European Credit Market: Close To Panic (Update)

While investors in the European credit market more or less capitulated last week, the situation is now more like a total panic. ECB President Jean-Claude Trichet says that the risk to the financial system is as high as it possible can be, putting the mark in RED zone on the new colorized risk meter.

“This did little to boost confidence in a market that already had concerns over the Greek government’s ability to get its austerity measures through parliament.”

Gavan Nolan

The Markit iTraxx SovX Western Europe breached the level  of 240 basis points for only the second time on record. Greek spreads blew up 213 bp’s, to 2100. Portugal gained 50 and are now trading at at record wide levels – 825 points. Other peripherals also widened sharply.

Contagion watchers will have been concerned by the significant moves in Spain (305bp, +22) and Italy (200bp, +20).

The latter sovereign went above 200 basis points  for the first time since January.

See also: Capitulation in the Credit Market

After ECB president Jean-Claude Trichet said that the risk to the financial system is as high as its gets. Trichet also said that the newly created European Systemic Risk Board was planning a “risk dashboard” with a color-coded warning system. And when asked what the current color would be, he answered; “on a personal basis, I would say it is red”.

“Unsurprisingly, this did little to boost confidence in a market that already had concerns over the Greek government’s ability to get its austerity measures through parliament. The conservative opposition declared that it would vote against the bill. This was to be expected and was consistent with its recent position. But there are signs that members of the ruling socialist PASOK party could also vote against the bill, placing its passage in doubt. Even if the government gets the measures through parliament it faces a considerable challenge in implementing them,” analyst Gavan Nolan at Markit Credit Research writes in today’s Intraday Alert.

Adding: “Talk of a “black hole” in the austerity plans added to negative sentiment.”

But the peripherals didn’t have just Greece to contend with, Nolan continues.

“The markets were already in a bearish mood after Ben Bernanke’s cheerless assessment of the US economy, and yet more disappointing economic data was unlikely to be shrugged off. So it proved with the release of Markit PMIs this morning.”

Recession Is Back?

Overnight the Markit/HSBC Flash China Manufacturing PMI came in at 50,1 –  a significant drop from the previous month,  and an 11-month low.

“A hard landing for the Chinese economy is one of the main fears of investors, and sentiment hasn’t been helped by the Sino-Forest scandal,” Gavan Nolan explain.

Growth momentum also appears to be slowing in the euro zone.

The Markit Flash Euro zone PMI fell to 53.6 in June, the lowest level since October 2009.

The core-periphery dichotomy is still evident, but worryingly the rate of growth in German manufacturing slowed sharply.

Output in the euro zone, excluding Germany and France, contracted for the first time since September 2009.

The data underlined just how difficult it will be for the peripheral countries to reduce their debt burdens through growth.

Volatility in the commodity world added to the tension.

Brent crude was down by over $6 a barrel to $107 after the International Energy Agency announced that its members were releasing 60 million barrels of oil from their emergency stocks.

Glencore – 302 bp’s, +36 – the world’s biggest commodity trader was the day’s worst corporate performer.

Here are copies of the latest Markit PMI survey:

Markit Economic Research: Eurozone PMI. 23062011.

Markit Economic Research: PMI and CBI surveys compared. 23062011.

Markit Economic Research: HSBC Flash China Manufacturing PMI. 23062011.

Markit Economic Research. China PMI Flash Comment. 23062011.

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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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Credit Markets: Calm & Consolidated

It seems that the credit markets are in the midst of one of their quietest periods for some time as investors look to consolidate after the recent rally, according to Markit Credit Research. Market participants didn’t seem to pay any attention to neither Egypt or Europe, Wednesday.  However, the fear of contagion in both areas is still very much present.

“The contagion effect is still there, but was not as noticeable as it was last week.”

Gavan Nolan

The sovereign CDS spreads widen again today. The Markit iTraxx CEEMA index still underperformed the Markit iTraxx SovX Western Europe, giving back some of the ground it made up over the last few days. But elsewhere the market was directionless.

Omar Suleiman, the vice-president who has emerged as the apparent power-broker, warned that Egypt could face a disastrous coup if talks aren’t successful and disorder continues.

The protests in Cairo are entering their third week and the masses have now gathered outside parliament. And so far there has been little sign of the protest fatigue that the authorities appear to be counting on.

“The contagion effect is still there, but was not as noticeable as it was last week,” credit analyst Gavan Nolan writes in his daily summary.

The Markit iTraxx Senior Financials index bounced back after widening in the previous two days.

“The sovereign market had negligible impact, and the relatively thin liquidity in the index probably contributed to the swings, according to traders,” Markit reports.

Speculation that Axel Weber’s decision to not stand for a second-term as Bundesbank president, rules him out of the ECB presidency may also have helped peripherals. Weber is a vocal opponent of the ECB buying peripheral debt, and him leaving the race to succeed Trichet could be interpreted as a positive development for the euro zone stragglers.

But it is not clear that Weber has ruled himself out –  and even if he does,  it is not given that a more dovish candidate will become fill the position.

• Markit iTraxx Europe 96bp (+1), Markit iTraxx Crossover 396bp (+4.5)
• Markit iTraxx SovX Western Europe 168bp (-3)
• Markit iTraxx Senior Financials 159.5bp (-5), Markit iTraxx Subordinated Financials 272bp (-2.5)
• Sovereigns – Greece 810bp (-3), Spain 234bp (0), Portugal 433bp (+9), Italy 173bp (0), Ireland 562bp (+4), Belgium 164bp (+2), France 88bp (+1)
• Egypt 355bp (+18), Tunisia 175bp (+5), Morocco 170bp (+5), Saudi Arabia 107bp (-1), Bahrain 232bp (-2), Qatar 96bp (-1), Lebanon 350bp (-5), Israel 135bp (+3)

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