European Credit Concerns Intensify

Ground zero in the global flight from risk that�s driving stocks lower is the European credit market.

Gavan Nolan, vp of credit research from Markit, the credit default swap specialist, reports spreads have turned sharply wider (that is, weakening) to the worst levels since Friday, May 7, just before the $1 trillion Shock and Awe bailout package from the EU and the IMF.

He writes:

The discord among EU members has disturbed the markets, and the lack of unity has only served to raise suspicions about possible debt restructurings in the near future.

Given this it was no surprise to see sovereigns widening, though liquidity was poor. Buyers of protection are re-entering the market, some of them clearly of the view that Bafin’s ruling won’t be followed by the other major European regulators. The Markit iTraxx SovX Western Europe index was 18bp wider at 144bp, with the peripherals under relentless pressure. Greece went through the 700bp level, the first time it has done so post-bailout. Portugal (335bp, +57)underperformed throughout the day, and Spain, Ireland and Italy all widened.

The decline in risk appetite was evident in corporates, where there were few tightening credits. Commodity names widened dramatically, their exposure to the business cycle leaving them exposed to fears about global growth. Commodity prices have fallen sharply, driven not only by the problems in Europe but also by concerns that China’s tightening in monetary policy will hamper growth and curb demand.