SocGen: Euro Credit Market Wrap Up

Watch out! By Suki Mann at Societe Generale tonight:

Highlights: .Euphoric. is the only way to describe the initial equity market response to the latest .toxic asset. plan, which may or may not succeed. To put it simply, nationalisation of US banks is staring us in the face if it doesn't. Our view is that we're still at an inflexion point for this financial crisis, and months away from evidence as to the effectiveness of QE and the latest plan. And credit has refused to be sucked in by it. Turning point or not, credit conditions are easing, but there's little evidence that corporates are investing and consumers borrowing, and it will be like this for a while yet. So it's not just about removing busted assets off bank balance sheets, finding a clearing level for them and improving liquidity and access to it - it's about injecting confidence that the fundamental outlook is a little rosier. Well, manufacturing is in the doldrums (although European PMIs were indicating a bottoming out of economic activity), jobless totals continue to rise; inventories are not being depleted fast enough and global consumption remains very weak - possibly bottoming out, at best. Adding significant risk now and getting it wrong could be a painful decision, as evidenced by credit's reaction to the 7% overnight rally in US stocks, which was muted to say the least. Admittedly, cash spreads were generally tighter as the Street bid up the market, but activity was very limited. The indices opened in better shape but drifted wider throughout the session. Either credit market participants are non-believers, or investors are keeping their powder dry in readiness for the supply onslaught. Risk addition-wise, we continue to prefer staying close to home - telecoms, utilities and solid corporates, with senior banks bringing up the rear. For those with greater risk tolerance, selected subordinated financials also offer some interesting opportunities.