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.
.
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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Related Articles:
- Goldman Turns Bullish on Stress-Tested Bank Debt: Chart of Day (businessweek.com)
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- Euro Weakens, Greek Bonds, Stocks Fall as Commodities Decline (businessweek.com)
- Greece faces new debt crisis amid fears of default (guardian.co.uk)
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
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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