Portugal spreads widen as political chaos continue

President An"bal Cavaco Silva's unexpected call for early elections in June 2014 was not well received by the markets today. Earlier this week European leaders welcomed a proposed cabinet reshuffle aimed at preventing a potential break-up of the ruling coalition.

A call for elections immediately after the expected end of the three-year bailout agreement raises concerns regarding the future commitment of political parties to required reforms. The fact that Portugal's opposition leader has called for a renegotiation of Portugal's bail-out terms has definitely not helped either. CDS spreads on Portugal were trading at new highs for 2013 today at 570bps. This is the widest level seen for the sovereign since November last year.

Closer to home, following the great successes of last weekend's Lions' victory and Andy Murray's Wimbledon triumph, there was more good news for the British Isles today as CDS spreads on both the UK and Ireland tightened.

Standard & Poor's upgraded Ireland's credit rating outlook from stable to positive, stating that there is a good chance Ireland would over-achieve its fiscal targets and reduce its government debt faster than expected. The Irish coalition government's has shown commitment to budget austerity measures as the country aim to emerge from its bailout at the end of this year.
In the UK a "1bn motor industry initiative that could create thousands of jobs was unveiled by the Business Secretary Vince Cable. This financial commitment is backed by 27 companies in the motor industry sector, including supply chain companies, and it is expected to secure at least 30,000 jobs.

CDS spreads on Ireland tightened by 5bps to 157bps while spreads on the UK tightened by 1bps to 46bps. This is in contrast to the Markit iTraxx Europe index which widened by 2.5bps to 108.3bps today after a good performance yesterday.

In the US there was some good economic news in that Producer Price Index rose more than expected in June. The PPI was up 0.8% against expectations of 0.5% indicating that inflation could be picking up, a sign of increased consumer demand and a strengthening economy. However the US Consumer Sentiment index came in slightly weaker than expected for July.

J.P. Morgan today unveiled a strong set of quarterly results. Profits rose 31% from the second quarter last year, beating estimates. Although it is worth noting that the same period last year included most of the more than $6bn in trading losses incurred by the "London Whale". Wells Fargo also beat estimates with their second quarter profits up 19% from last year.
CDS spreads on J.P. Morgan traded relatively flat on yesterday at 89bps, but significantly tighter compared to a 129bps at the same time last year. Wells Fargo's spreads remained relatively flat as well at 71bps while the Markit CDX.NA.IG index widened slightly by 0.5bps to 78.8bps.


Frans Scheepers, CFA
Vice President
Credit Indices

Markit

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