European credit spreads inched tighter on Wednesday, with the potential impact of a $9.4 billion writedown by Morgan Stanley mitigated by its raising of $5 billion in fresh capital from China. By 1520 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 347 basis points, according to data from Markit, 4 basis points tighter. The investment-grade iTraxx Europe was at 51.5 basis points, 1.25 basis points tighter.
"We're a smidge better," said a trader in London. "There's very little going through, more indices than anything else." Morgan Stanley's results - which included a much worse-than-expected fourth quarter loss - pushed the indexes slightly wider for a brief period, but they later recovered.
"They (Morgan Stanley) hedged it quite carefully with the comments about having another $5 billion in capital from China," the trader said. That wasn't enough, however, to stop Standard & Poor's from putting the second-largest US investment bank on watch negative, saying it could downgrade its rating to A+ from AA-.
S&P analyst Scott Sprinzen called the results "dismal" and said they raised questions about the bank's strategic direction and risk appetite. Among single names, there was little activity, although a couple of credits stood out.
Five-year credit default swaps on UK home improvement retailer Kingfisher widened some 7.5 basis points to 147.5 basis points after S&P changed its outlook on the company's BBB- rating to negative.
And CDS on Finnish paper maker M-Real widened 20 basis points to 590 basis points after the struggling company said it would make a loss from operations in the fourth quarter due to increasing wood costs, problems with pulp production, and the strong euro.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 98.0 basis points more than similarly-dated government bonds at 1524 GMT, 0.7 basis points more on the day.
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