UNITED STATES
The threat of increased regulation in the US financial
services sector kept widening pressure firmly on US corporate CDS
markets throughout the end of January. While initial moves at the start of the
year were tighter, more challenging political rhetoric, combined with greater
concerns that the People’s Bank of China might start to tighten monetary policy
sooner than had been anticipated encouraged more creditors to buy protection.
This is perhaps understandable following the solid credit rally through the
latter half of 2009. Banks and brokers saw the most significant
deterioration in risk, with consumer staples names also seeing
pronounced widening pressure. Although typically viewed as more defensive, the
Staples group started moving wider from low absolute levels.
EUROPE
European credit markets quickly reversed a bullish end to 2009, with the
iTraxx rallying off tights of 65bps to close the month at 83bps, back above the
80bps level that had proved such strong support in the fourth quarter. The
bearish tone was set by the financials index which pushed out from
63bps to 90bps, closing the month near the widest premium to the main corporate
iTraxx since the indices were first created over 5 years ago.Banks were the
focus; more specifically it was the Greek, Spanish, Portuguese and Italian
banks that drew most concern – a direct result of increased default risk
being priced in to the Sovereign CDS of those more highly indebted euro zone
nations. By the end of the month, sovereign and financial concern had spread to
the incumbent telcos and utilities of the same nations.
ASIA
In Asia, much of the focus remained with the Japanese sovereign
contract through January, with Standard & Poor’s downgrading their Long-Term
Credit Rating Outlook to ‘Negative’, from ‘Stable’. Specifically, S&P
highlighted their concerns that the political administration in Japan lacked a
sufficiently credible plan to improve the fiscal position of the country.
Elsewhere in the region spreads also moved wider, driven by concerns over growth
in China, and also due to contagion from the Japanese sovereign. Volumes
remained most heavily concentrated in the Japanese ‘blue-chips’, as well as
macro instruments.
SOVEREIGNS
Sovereign risk was the watch word at the turn of the year, and concern over
Sovereign default in Western Europe continued to rise throughout January.
Mounting budget deficits, accounting discrepancies and hesitant political action
drove the Western European SovX to new highs, and a premium to the corporate
iTraxx. Greece captured the headlines, though Portugal and France
moved more in percentage terms over the month. Spain and Germany were also not
that far behind, as credit traders suggested that trouble in Greece is an
EU-wide problem, and FX traders sold Euro as a direct result.
Elsewhere, sovereign risk was better contained, though the CEEMEA SovX did
trade 10% wider from creation, two weeks into January. In Latin America,
Brazil led the widening, though modest in comparison with activity
in Europe, whilst Venezuela was narrower on the month. S&P
raised their outlook on Venezuelan debt after the country devalued its currency
early in January.
