SocGen: Overview Of European Credit Markets ...

Looking back to the last week the analysts at Societe Generale wrote (the iTraxx credit market indexes were posted here):

The news flow is dire from whichever way we look at it: economics left us with a poor retail sales season and a raft of profit warnings from the retail sector; the corporate results are below reduced expectations and we have had a raft of negative news from the banking sector. Bank of America was set to receive $20bn of government aid plus an additional $118bn guarantee on its toxic assets, AIB in Ireland was nationalised and Citigroup fell sharply with its share price down some 40% so far in January. Unsurprisingly, equity indices fell and are now in the red for the year, the VIX is heading higher and government yields are falling again as risk aversion gains traction.

However, the good news is that the credit market was left to put in a more mature - read measured - response. The usually fickle iTraxx indices widened only gently and are still well below the levels seen at the close of 2008, while the cash market continued to grind tighter after a solid performance last week. But the star of the show was surely the primary markets which put in a stellar performance, following up the massive issuance last week. At the time of writing we had already seen EUR 13.6bn hit the screens, making this the most successful week in well over a year, slightly ahead of last week's EUR 11.75bn. The combined total puts January's tally over EUR 25bn already, the most successful month ever. Furthermore, the deals in general continue to perform well although we have started to see some signs of indigestion and a couple of deals have moved slightly wider on the break. But overall, the new issue market continues to draw attention, sustained by a strong institutional bid and increasingly combined with a retail bid.

But can this performance hold? We tend to think so, despite the negative news coming our way. We believe that the cash market will remain relatively stable and even if spreads stop tightening we do not expect them to widen materially. Appetite remains strong, despite one or two signs of over-indulgence but so long as deals are carefully nurtured, banks won't destroy the goose that lays the golden egg.

You know, government support for banks is healing credit markets, but not necessarily bank equity ...