Summary

  • Decent macro numbers and Q4 reports drive spreads tighter

  • Primary markets remain busy with high new issuance activity 


Market comment

The notion of a 2012 January rally was supported by a general tightening trend across the various indices. As such the iTraxx Main is now trading around +145bp, some 9bp tighter during the week. The iTraxx Crossover is 38bp tighter, now reading 610bp. This week’s spread tightening has been fuelled by an overweight of positive surprises from both US and EU macro indicators, combined with a decent start to the Q4 earnings season. Risk sentiment surrounding financials also got a boost from an article in the Financial Times, which indicated that France and Germany were contemplating a relaxation of the Basel III rules and the timing of implementation. This theme helped boost the Senior Financials index to its current level of 213bp, some 15bp tighter over the week. 


Disappointing earnings may have bottomed out

Being a bellwether of the industrial sector, SKF’s disappointing Q4 11 result indicates that earnings reports for the sector are likely to hold negative surprises in the coming weeks. Indeed, most Nordic non-financials have reported disappointing Q4 earnings so far (SKF, SCA and Ericsson), while financials were mixed (Nordea beating expectations, while Jyske Bank disappointed). According to Bloomberg, so far some 63% of the Q4 earnings reports in the US have surprised on the upside in terms of EPS. In Europe, the corresponding number is only 44%.

Interestingly, SKF’s flat outlook for Q1 12 indicates that the declining trend for the industrial sector has bottomed out and a few subsectors like energy, aerospace and North American auto/trucks are expected to show sequential rising demand. However, as demand is expected to continue to decline in Europe and continue to improve in North America, companies with large exposure to Europe are likely to remain subdued. 


Current rally is fragile

We caution that there are still plenty of risks out there that could rapidly suck the life out of investor appetite. Several Greek politicians have demonstrated unwillingness to tighten the austerity belt further, which could endanger the troika’s willingness to release the next tranche of support. This is vital if Greece wants to avoid a hard default by 20 March, when some EUR14.4bn of government debt matures. At the same time pressure is mounting from the IMF on the ECB to share the fate of PSI and accept haircuts on Greek government bonds. Pressure is also rising for Portuguese rates, which are weighed down by the downgrade to High Yield status from S&P, coupled with talks about the need for further bail-outs or public debt investor haircuts.