Dead Greek Cats Can Still Bounce

I suppose you can see it as a positive sign; Greek assets bounce just as good as any stone dead cat in any equity market. At least it makes great opportunities for French President Nicolas Sarkozy‘s beloved speculators.

“Yesterday’s spread tightening reflected the expected outcome, and it was no surprise to see a reversal today.”

Gavan Nolan

The credit markets were pricing in a victory for Greek Prime Minister George Papandreou in the no confidence vote last night, and they were proved correct. Papandreou, who now have earned the nickname “G-Pap”  gained the support for his whole parliamentary party. All according to plan.

“But the Greek PM’s survival didn’t trigger a relief rally; indeed, spreads widened significantly from the open. Yesterday’s spread tightening reflected the expected outcome, and it was no surprise to see a reversal today,” credit analyst Gavan Nolan at Markit Credit Research writes in his Intraday Alert.

See also: Deadline in Athens (Updated)

By the close the Markit iTraxx SovX Western Europe was at 224 basis points, about where it closed on Monday.

Greece was 82 bp’s wider, at 1925.

“The markets are aware that the no confidence vote was the first, and probably the easiest hurdle, for the Greeks to clear. Papandreou’s position is still fragile, though his victory yesterday must have bolstered his standing,” Nolan comments.

The vote on the next round of austerity measures is scheduled for June 28, but might be extended.

“Papandreou will now be more confident of getting the bill through parliament. But before then there is the European Commission summit tomorrow and Friday. This doesn’t now have the importance it did when it was regarded as the deadline for the Greek bailout.”

“However, the central issue discussed will surely be the thorny one of private sector participation, and the headlines coming from the meeting will no doubt have a bearing on spread direction,” Nolan writes.

In the corporate world there was a notable underperformer in the shape of Dutch firm Philips (100 bp’s, +25).

The company’s spreads widened sharply after it issued a profit warning.

“Philips’ margins have been under pressure for some, so the warning wasn’t a huge shock. But the scale of the revisions – EBITA for the lighting division will be 60% down from last year, consumer electronics down 71% – shook the markets,” Nolan explains.

Philips was one of many companies to point towards supply chain disruptions when it issued its forecasts after Q1 earnings.

But this time it blamed weak consumer demand in Europe.

This could well be a factor judging by the data coming from Europe’s major economies.

But it could also be a result of Philips feeling the pressure from low-cost Asian competitors such as Samsung and Panasonic.

“On the plus side Philips has a robust balance sheet and a strong credit profile, with its medical equipment division acting as a bulwark,” Gavan Nolan points out.

European markets will probably take their cue tomorrow from Wall Street’s reaction to the FOMC statement and Ben Bernanke’s press conference, both after the European close today.

“The tone of the statement is expected to be slightly more downbeat but also affirm the transitory nature of the current slowdown. Given that the Fed balance sheet is expected to stop expanding this month Bernanke will no doubt face lots of questions regarding the possibility of QE3,” Nolan concludes.

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