European credit spreads made a recovery on Monday after Lehman Brothers' unveiled plans to boost its capital base by $6 billion, but inflationary fears linked to soaring oil prices meant the market remained jittery. By 1520 GMT, the Markit investment-grade iTraxx Europe index was at 90 basis points, according to Markit data, 2 basis points wider than late on Friday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 1 basis point tighter at 487 basis points, having come close to breaking the 500 basis point barrier early in the session.
Lehman's plan to strengthen its balance sheet came as the US investment bank said it expected a second-quarter loss of $2.8 billion, prompting Fitch Ratings to cut Lehman's ratings to A+ from AA-, and change its outlook to negative. Moody's Investors Service lowered its outlook on Lehman to negative from stable.
Despite the ratings actions, credit spreads rallied on the Lehman news, with the headlines calming fears over the company's financial health. "It immediately removed some of the pressure from the market because the uncertainty is gone," said Jochen Felsenheimer, a credit strategist at UniCredit (HVB). He said Goldman Sachs' results would be a focal point for next week.
Capital raising was also a main talking point in Europe, with Switzerland's UBS concluding its rights issue, and Royal Bank of Scotland saying 95 percent of investors had subscribed to its 12 billion pound ($23.7 billion) rights issue.
Five-year credit default swaps on UBS were 10 basis points wider at 100 basis points, a trader said. CDS on RBS were trading in line with a slight widening of the iTraxx senior financial index at 80.5 basis points. But while the credit market regained its footing as the day wore on, a list of worries continued to weigh on sentiment.
Both credit and equity markets headed lower on Friday after US data showed that unemployment rose to its highest since October 2004. The dollar slumped and oil prices hit a new high of $139 a barrel. "It's a very vulnerable situation right now," UniCredit (HVB) credit strategist Jochen Felsenheimer said.
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