Early gains in European credit spreads were wiped out by late afternoon as fears about subprime exposures, this time at Europe's biggest bank HSBC, bore down on initial optimism about US retail sales. Goldman Sachs said HSBC would likely need a further $12 billion in provisions for its US subprime mortgage and home equity loans.
Its five-year credit default swaps were 6 basis points tighter however at 48 basis points, a trader said. HSBC, one of the biggest players in the structured investment vehicle (SIV) market, was earlier in the spotlight after it stepped in to support its two SIVs - Cullinan and Asscher - with funding of up to $35 billion. The move - the first concrete proposal by a bank to overhaul SIVs - will prevent the forced sale of assets in the SIVs which HSBC said it will consolidate onto its balance sheet and set up new debt-issuing vehicles.
"There is no material loss or extra capital requirement needed from them related to the SIV story. Goldman are just doing their own talk," the trader said. By 1630 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 379 basis points, according to data from Markit, 4 basis points wider versus late on Friday.
The index has recovered since a sharp widening in spreads to over 400 basis points last week, which had reignited fears of a deepening credit crisis. "There is not a huge amount going on. Equity markets are also relatively quiet," said Willem Sels, a credit strategist at Dresdner Kleinwort.
European and US stocks were weaker, despite early signals that US consumer sales were strong over the US Thanksgiving holiday which gave a brief lift to sentiment. "We had a very strong rally this morning in very thin volume," a second trader said.
The initial calmer tone prompted the European Covered Bond Council to recommend the resumption of inter-dealing market-making after a temporary suspension last week on the back of volatile markets and postponement of two covered bond deals.
Monday was a relatively sparse day for economic data in a week jam-packed with more numbers on the US housing market, durable goods, consumer confidence and speeches by Federal Reserve Chairman Ben Bernanke and St. Louis Fed President William Poole.
Nonetheless the UBS/Gallup Index of Investor Optimism showed investors' confidence in the US economy fell to its lowest level in two years in November on worries about high energy prices and the downturn in the housing market.
The primary market remains subdued with Dubai Electricity & Water Authority (Dewa) the latest casualty of rising borrowing as it postponed a planned Islamic bond. It had planned to sell as much as $2.5 billion of bonds to fund expansion.
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