European credit spreads clawed back some of the past week's sharp losses on Tuesday, but volumes were light and the focus held on recession fears and the primary market with new triple-A issuers braving the market.
By 1605 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 384 basis points, according to data from Markit, 5 basis points tighter versus late on Monday.
The investment-grade iTraxx Europe index was at 60.75 basis points, 1.25 basis points tighter. Although the Crossover index has widened by as much as 50 basis points so far in 2008 - the worst start to a year ever according to analysts at UniCredit (HVB) - thin volumes made it hard to judge just how gloomy the mood was.
"Things are a lot wider but no-one has written a ticket. It's really dead, just dreadful. People expect the world to come to an end in the next couple of months, that the world economy will fall to its knees," the trader said.
"No-one seems to have any alternative view to this. So we get in a position where any news that comes out is bad news, and everything is seen as bearish with the market driving itself down as it has lost confidence in itself completely."
Nagging investors are fears about a possible US recession which have intensified in recent days after a weak jobs report on Friday. Bets on a 50 basis point US rate cut at the Federal Reserve's next policy meeting on January 29-30 have risen sharply on worries about the outlook for the economy.
"Weak US data suggests the market needs to further adjust its appraisal of the recession risk for the US economy," said UBS credit strategist Geraud Charpin in a note. "The recent trend in client discussions suggests that the debate may soon turn into arguing whether it will be a short recession or a longer one".
Also in focus are figures due from investment banks with several big names having already taken massive subprime-related writedowns. Citigroup reports fourth quarter earnings next Tuesday, followed by Merrill Lynch on Thursday.
"They (any writedowns) need to come with new big figures on them...with $20 billion rather than anything in the teens for eyebrows to be raised. You need to set a new benchmark for writedowns in high numbers to really impact at this point," the trader said. But barring any negative shocks there, banks may then be more willing to take assets on their books. "That could be the cue for the market to get itself together a little bit," the trader said.
The primary market will also be eyed as an indicator of the risk appetite among investors. Several triple-A rated issuers, including KfW and countries Greece and Austria, have braved the market in recent days but spreads have varied widely. New non-financial bond deals are yet to surface.
On Tuesday Dutch co-operative bank Rabobank set final guidance on its 1.25 billion euro ($1.8 billion) 10-year bond, with order books at over 1.5 billion euros. Final guidance was set at mid-swaps plus 19 basis points versus revised guidance of mid-swaps plus 18 to 19 basis points set earlier.
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