Credit Markets Update: European market remains fragile and volatile

The recent volatility trend in the European credit derivatives market continued unabated this week, remaining in line with equity market sentiments as the bearish market showed no signs of subsiding. Markets were quiet and generally lacked liquidity, traders said.

Five-year credit protection for Swiss-Swedish engineering firm ABB jumped 200 basis points on Wednesday from 600/700bp to 800/1100bp following an earnings release. The second-quarter results included some unexpected write-offs and a lack of firm news about a structured finance disposal. Today, there was very little trading on the name, according to a senior trader at ABN Amro in London.

Meanwhile, an earnings release on Wednesday from German electronics company Siemens prompted its five-year credit default swaps to widen 15bp to 75bp-mid. “The markets are fragile, and despite some reasonably good third-quarter numbers, the market jumped on concerns about future profitability,” another senior credit derivatives trader in London said today.

The cost of protection on fellow industrials, including Unilever, BASF and Bosch, widened 3-5bp, but a recovery on Thursday saw spreads revert to their prior levels. “The secondary credit markets are extremely fragile right now, and credit default swaps are no exception,” the trader added. “Now people are stepping out of the market and waiting to see what happens next”.

The European telecom sector saw more volatility over the week, with credit default swaps on the major names fluctuating 10-30bp. Earnings announcements from British Telecom and France Telecom on Thursday bought spreads back in. France Telecom said it has signed an agreement to sell broadcasting services unit Telediffusion de France to a new consortium in a bid to reduce its debt, and also hinted the French government could play a critical role in debt refinancing. Today, five-year credit defaults swaps for France Telecom and British Telecom were trading back at 440bp-mid and 175bp-mid.

There was no respite in volatility for European financials as the weak equity market continued to move insurer spreads wider. Rumours of a financial crisis at Zurich Finance on Wednesday caused panic buying of protection, with credit default swaps for major European insurers widening by 20bp. Five-year senior protection for Swiss Re traded at 100bp in the five-year, 30bp wider than on Wednesday. And Spanish Bank Santander was downgraded to A+ by Standard & Poor's on Wednesday. Its five-year senior protection widened 15bp to 60/65bp.