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Credit Wrap
June 27 2008, Markit Credit Wrap - The Week in Perspective
A growing realisation that the problems facing European banks are far from over has led to spreads widening significantly this week. Belgo-Dutch firm Fortis saw its stock price plunge and its spreads widen after it announced plans to raise more than EUR8 billion. The capital will come in the form of a new stock placement; scrapping the interim dividend; a property sale and leaseback; disposals and a hybrid instrument issue. As most of these come at the expense of shareholders, spreads outperformed the stock price on a relative basis. This is a trend that has been prevalent among financials in recent weeks and could well continue as more banks come to raise capital.
This is not to say that the spread performance has been good. Fear of more write-downs and uncertainty over the availability of capital in the future will continue to weigh on spreads. Today the sector is wider following negative analyst reports on Barclays. The UK bank announced earlier this week that it would raise £4.5 billion to shore up its balance sheet. However, a Citigroup analyst today pointed out that it would leave Barclays with a core tier one ratio of 5.8. This is still weak and compares unfavourably with its European peers, including Royal Bank of Scotland. Both firms' spreads were wider today, according to Markit Intraday, and outpaced the iTraxx Financials index. This pattern is typical in times of stress as the index has a significant weighting towards the less volatile insurance sector.
Oil, for a while the elephant in the room, is no longer in the shadow of financial turmoil and is now the main driver of spreads. The price of crude today reached another high, breaking through the $142 barrier amid supply concerns. Libya warned that it is considering production in response to new anti-OPEC US legislation. The bill before US Congress would allow the government to sue OPEC members for cutting supplies. The proposal is a populist measure and is likely to be ineffectual, as shown by Libya's response. Comments for OPEC's President Chakib Khelil that crude prices could hit $170 before the end of the year also contributed to the price rise.
Investors are still trying to discern the extent of the oil effect on the wider economy. Today's US core inflation figures suggest that firms are not passing on all of the higher costs to consumers, a development that will be welcomed by the Federal Reserve. Leading indicators still indicate weakness in the coming quarters, even if this is yet to show in official government figures. In the UK, the CIPS/Markit PMI surveys, due to be released on Tuesday, will be closely watched for evidence on economic activity and inflation.