Credit Markets Update: bleak market sentiment and TMT woes drive spreads

European credit default swap spreads have continued to follow the equity market’s lead this week, tightening on Monday but widening again today. The volatile technology, media and telecoms sector set the tone for the wider market.

Spreads in the default swap market were exceptionally volatile last week, led by telecom credits, which were 30-35 basis points wider on the week. Corporates and utilities had widened by 15-25bp and 5-7bp respectively.

But the market tightened in line with improvements in the equity markets at the start of this week. The cost of protection on Deutsche Telekom and France Telecom – two particularly volatile credits – was 10-15bp tighter, and British Telecom and Telecom Italia were about 7bp tighter. Spreads on autos also came in on Monday with Ford, General Motors and Daimler Chrysler narrowing 5-7bp.

Credit default swaps on Spanish energy company Repsol also tightened on Monday. “Following Argentina’s announcement that it will drop a limit on crude exports and scrap a proposal to bar repatriating earnings, credit default swaps on Repsol contracted [about] 70bp from 540bp mid to 475bp mid, and are now relatively stable at this level," said Antonio Di Flumeri, managing director and head of credit derivatives trading at Deutsche Bank in London.

On Tuesday, bad news from blue-chip US technology companies caused sentiment to turn negative in Europe, sending stocks lower. Spreads on telecom companies widened out. Today, credit default swaps on France Telecom were trading back at 450bp mid (445/455bp). "France Telecom is one of the weaker telecom credits and is likely to be penalised with equity sell-off," says Di Flumeri. Ericsson also widened 40bp to 640bp mid, following a one-notch downgrade, to Baa3, by Moody’s Investors Service on Monday.

Other sectors have seen weak trading in the credit default swap market this week. Traders in London today predicted that macro-fundamentals and general economic pessimism would continue to influence the credit default swap market for autos, industrials and utilities.