Hyperventilating, Or Just Taking a Breather?

After yesterday’s panic – mostly due to the negative S&P action on US  debt – the markets returned to something resembling “normality,” Tuesday. But the fear is still out there. And one can not say for sure if the market participants are just taking a breather or if they’re hyperventilating.

“The talk of a Greek restructuring hasn’t gone away; indeed there were further reports of a German government official saying that a haircut was inevitable.”

Gavan Nolan


It was quite a busy day in credit markets Tuesday, as the US earnings season was billed as the main event. A strong performance from two prominent names helped spreads rally in the afternoon. But there’s still a ticking bomb beneath the surface.

Greece’s fiscal fate, the other driver behind recent volatility, was also bubbling under the surface.

“But investors appeared to take a breather today in what was probably another session affected by the upcoming Easter holiday,” credit analyst Gavan Nolan at Markit writes in his daily comment.

Well, there’s also the possibility that the market participants are hyperventilating as another anxiety attack is building up inside.

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Roasting A Pig?

“It sound contradictory to say that it’s a disappointment if Goldman Sachs’ earnings don’t beat expectations but that’s how the market treats the company’s results,” Nolan points out.

Now, that is interesting; why?

The bank that sees itself as some kinda God, but are seen by others at the manifestation of the devil,  performed about what could be expected in the first quarter of 2011.

Goldman’s profits, however, came in well ahead of the  consensus estimates.

The bank’s earnings per share was $1.56, significantly down on last year, but still almost double analyst estimates.

“It’s all-important FICC division’s revenues jumped 164% from a disappointing fourth-quarter, defying forecasts of a difficult start to the year,” Gavan Nolan highlights.

Goldman’s spreads have underperformed its larger banking rivals over the last six months, with many predicting that its reliance on trading revenues would suffer disproportionately.

“That didn’t happen, but it will interesting to see on Thursday how Morgan Stanley fared,” Nolan notes.

Johnson & Johnson, one of the few AAA-rated corporates left in the credit universe, also surprised on the upside.

The company’s sales rose 3.5%, beating expectations, and it raised its full-year earnings guidance.

“A rebound in housing starts and permits completed the positive picture from the US,” the Markit analyst writes.

The Slaughter House

The widening in European sovereigns was curtailed Tuesday, with profit taking probably making some contributions.

“The talk of a Greek restructuring hasn’t gone away; indeed there were further reports of a German government official saying that a haircut was inevitable,” Gavan Nolan writes as a final remark.

Peripheral banks rallied in tandem with the sovereigns.

  • Markit iTraxx Europe S15 100.75bp (-1.5), Markit iTraxx Crossover S15 373.75bp (-9.5)
  • Markit iTraxx SovX Western Europe S5 187bp (-2)
  • Markit iTraxx Senior Financials S15 133.5bp (-6), Markit iTraxx Subordinated Financials S15 235bp (-10)
  • Sovereigns – Greece 1240bp (+4), Spain 241bp (-12), Portugal 608bp (-12), Italy 151bp (-8), Ireland 600bp (0)
  • Japan 86bp (+1)
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