Nokia fails to impress

Mixed economic news in Europe and disappointing corporate results in the US led to credit continuing its modest retreat this week.

Apple's sales miss and indications that the technology company's growth would slow in the second-quarter ensured that European markets opened up on a downbeat note. By mid-morning the Markit iTraxx Europe was trading at about 107bps, its widest level since December 31.

A worryingly weak PMI from France added to the negative sentiment. The Markit Flash France PMI dropped to 42.7, well below expectations and the sharpest rate of decline in almost four years.

However, this disturbing news from the eurozone's second-biggest economy was offset by more encouraging data from Germany, the currency bloc's economic powerhouse. The Markit Flash Germany PMI came in at 53.6, the highest reading for a year and trouncing expectations of a small rise. Germany's strong performance no doubt helped the Markit Flash Eurozone PMI rise to a ten-month high of 48.2.

Overall, the PMIs - indices for China and the US were also up on last month - should be taken as a positive development. , though However, tthe large divergence between France and Germany is concerning and it should be remembered that the Eurozone PMI is still in contraction territory. Markit economists noted the €/$ exchange rate whipsawed violently in reaction to the two countries' PMIs - a reflection of the uncertain growth outlook for the region in the months ahead.

Amid all this news, European corporates stayed stubbornly wider throughout the day, though the momentum waned later in the afternoon. Italian banks continued to underperform as the rumblings around Monte dei Paschi continued. The bank has announced losses relating to a series of derivatives deals, and the issue has now crossed over into the political arena. Monte dei Paschi will require state aid to absorb the damage done to its capital position, which is one of the weakest in Europe. The bank's CDS widened another 35bps today to trade at 470bps, and have now given up about 70bps since the losses first emerged.

In the high-yield universe, Finnish telecoms equipment maker Nokia was under scrutiny after it released its fourth-quarter results. The company pre-announced its sales numbers and gave guidance on the first-quarter earlier this month, so credit investors were really concerned with the firm's cash flow numbers.

As it turned out, the cash figures were better than expected. Operating cash flow of €563 million and a net cash position of €4.36 billion both exceeded expectations. The announcement that Nokia will not pay a dividend this year - the first time it has not done so in more than a hundred years - was also welcome from a credit perspective.

However, after initially tightening, Nokia's spreads soon relinquished their gains and finished the day slightly wider at 590bps. While the cash and margin numbers were a pleasant surprise, the company also revealed that it will pay a net fee to Microsoft for use of its operating system. This had not been disclosed previously and the arrangement appeared cash positive for Nokia. This important detail may have dampened the initial positive reaction. Still, it should be noted that Nokia is in a far better position than last summer, when its spreads were trading well over 1,000bps.

Download full article