European credit spreads widened in thin trading on Tuesday, tracking a fall in stock prices led by bank shares on concerns about the impact of the credit crisis. By 1417 GMT, the investment-grade iTraxx Europe index was at 56.75 basis points, about 2.5 basis points wider on the day.
Despite negative news about banks, the iTraxx five-year senior financials index widened only by about 1.5 basis points to 53.25 basis points, a trader said. "It is December, and liquidity is very poor. Relative moves here or there will skew things one way or another," said Mehernosh Engineer, a senior credit strategist at BNP Paribas.
He also pointed out, however, that the negative news was focussed on US banks, which are not constituents of the European financial indexes. "None of the names being downgraded are in the European indexes, so there may be less buying of protection against them," he said.
Analysts at J.P. Morgan Chase cut their earnings estimates for major Wall Street security firms, contributing to a fall in US stocks. European shares were also down, with the FTSEurofirst 300 index down nearly 1.4-percent.
"The changing mood in credit markets is partly driven by the increasing nervousness in money markets but also due to concerns regarding the impact of the Paulson (subprime mortgage) plan and Moody's warning on downgrades of more than $100 billion of SIV debt," analysts at UniCredit (HVB) said in a note to clients.
On Thursday, Royal Bank of Scotland, which is on the European indexes, is due to provide a trading update. "Rumours are flying around with all kinds of numbers," Engineer said. "It will take some time for even RBS to know what's on ABN's books", after it bought the Dutch bank's wholesale business in October.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 366 basis points, according to data from Markit, 8 basis points wider.
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