16 January 2012 – “Steady, As She Goes” (The Raconteurs, 2006)

16 January 2012 –  “Steady, As She Goes” (The Raconteurs, 2006)

Markets took the Friday 13 S&P downgrades with attitude, opening slightly softer, but far from bad. Currency testing 1.2650 support and then settling around it. There was not much to chew on, outside raking one’s brain about further developments. Equities and credit about unchanged into the afternoon and then actually trading better. Looking for inspiration: next lead, next leader, next shoe to drop, something. Moody’s adding a layer on its French AAA rating outlook and stressing debt ratios. ECB deposits now at EUR 493bn, another record high. Greece talks stalled, postponed to Wednesday.

The one notch downgrade of Austria and France was no huge surprise and by and large priced in. It’s the Italian and Spanish downgrades that are more worrisome, as is the general negative outlook applied to all but Germany. That Germany is spared remains surprising, as if push came to shove Europe-wide, Germany would certainly still need to cash out, be it in some form of supply credit, given its dependence on exports to Europe (63% EU 27). Margins for Italian bonds were duly raised by LCH and its Italian peer. Otherwise, note that Cyprus has been junked by S&P (still IG with the peers), which given the size of the island doesn’t trigger much, but just adds to list of European / EZ-zone non-IG names. Bailed-out Ireland was affirmed at BBB+. Obviously, next to the headline rating of the sovereigns, expect a trickle-down effect to related agencies and banks in he coming days. EFSF’s AAA certainly on the block, too. Then again, it never traded like a strong AAA and has settled around Austrian / French levels lately. And few ever believed it was anything stronger than an upper average of Europe. Despite all that, France’s EUR 8bn bill auction went fine with yields lower.

All spreads to Germany [AAA stable outlook] by and large steady and then tightening throughout the day, with the exception of Portugal getting trashed after loosing its last IG rating: Netherlands +26 (-6) [AAA unch, now neg outlook], Finland +34 (-5) [AAA unch, now neg o] , Austria [downgraded to AA+, with neg o] +124 (-6), France [now AA+, with neg o] +126 (-6), Belgium [AA unch, now neg o] +232 (-7), Spain [A from AA-, with neg o] +341 (-5) and Italy [Now BBB+ from A, with neg o] +484 (-2). ECB buying early in the morning to keep things positive. Portugal 2’ and 5s up by over 230bp, 10s up by 190.

Oh, yes, and Greece softer, too, but numbers here have become slightly irrelevant, as outwardly (2 YRS trade 150% in yield). Troika back in Athens. PSI discussions to resume Wednesday.

As was to be expected, new issue supply was subdued. BNZ bravely used the absence of other traffic to announce a new EUR 5 YRS covered bond deal. CADES and Belgium readying up benchmarks for the coming future.

Low IG French retailer PPR venturing a 3-year benchmark increase (CDS mid 155s) on a former 5 YRS deal with a 25 bp NIP, clocking in a 3.25% yield and subsequently preferring price to size.

Overall, a surprisingly steady day, however in absence of US players, things were kept low-key.