report: “potentially the worst economic outlook we’ve
had since the Depression”
Once again credit
markets are signalling not all is well, despite rallying
equity markets in Europe on Monday.
is being driven by a continuing wave of deleveraging, with
investors seeing companies needing to raise cash and sell
assets adding to existing concerns about corporate credit
quality over the next year. And moreover that there will
not be enough demand to support corporate bond issuance.
is underperforming equities because creditors fear supply
of new bond issues may exceed demand,” said Willem
Sels, head of credit strategy at Dresdner Kleinwort.
pushed the Markit iTraxx Crossover index of junk rated borrowers’
credit default swaps to new record wides. At 1130 GMT it
posted a new wide of 783 basis points according to one trader.
Markit had a closing level of 760.4bp Friday amd 779bp at
1133 GMT. “It feels veryweak,” said one credit
trader. “High beta names are much wider.”
The LevX index
of credit default swaps on risky loans was two points lowerat
83 - implying the market believed that 70 per cent of the
constituents of the index would default on their secured
loans, said the trader.
credit derivatives indexes are also wider, as were initial
indications of pricing on the US investment grade CDS index.
does seem to be a consensus emerging that there has been
a genuine thawing in the money markets and it does seem
that systemic risk has been underwritten by the Governments
around the globe (…)So it appears we can mostly move
on to how badly the economy is likely to perform in 2009.
Over the weekend our economists have sharply lowered their
forecast for the Global economy. They now expect a major
recession for the world economyover the next year, with
growth in industrial countries falling to its lowest since
the Great Depression and global growth falling to 1.2%,
the lowest since the early 1980s,” said Jim Reid at
Deutsche Bank in a note this morning.
Some of the companies
seeing the greatest deterioration in credit spreads include
Veolia Environnement. The cost of protecting its debt from
default rose to 170bp versus a closing level of 134bp according
to Markit. The moves came as the French waste management
company plunged 21.3 per cent to €18.41 after it cut
is outlook for both investment and operating cash flow for
2008 as economic growth slows. The credit checking group
Experian saw the cost of protecting its debt from default
rise from 101bp from 87 bp Friday, according to Markit.
The move follows reports analysts cut their earnings per
share estimates on the company.
This week sees
US third quarter earnings seasons kick off, “but the
real deterioration in the economy is only just beginning
so the market is
unlikely to pay disproportionate attention to such backward
looking information,” says Reid. ” The focus
now will be on how earnings hold up in
light of potentially the worst economic outlook we’ve
had since the Depression.”