No respite for risk assets

There was no respite for risk assets on Monday as volatility continued to grip markets.

The central banks of the US and China, both friends of bullish investors for so long, have taken steps to dampen risk appetite.

In the US, the Federal Reserve has signalled that it is preparing to taper its quantitative easing programme in the coming months, though the timing will depend on labour market data. The prospect of liquidity being sucked out of the markets has led to spreads widening, particularly in emerging market and high-beta names.

China's monetary authorities have also shaken sentiment in recent days. The People's Bank of China has refrained from intervening in the interbank market, a stance that has pushed up funding rates to unprecedented levels.

The PBC said on Monday that liquidity was at a "reasonable level", which didn't calm nerves among investors. China's sovereign CDS widened 23bps to 147bps today, and are now at their widest level since January 2012.

European credit has been crushed by the joint pressure from the Fed and PBOC, and very few names escaped the deterioration. The Markit iTraxx Europe widened 9.5bps to 133.5bps, while the Markit iTraxx Crossover was 31bps wider at 531bps.

One name that did manage to rally was Kabel Deutschland. The German cable TV company agreed to be acquired by Vodafone in a cash bid worth €10.7bn in enterprise value, bringing to an end weeks of takeover speculation. US group Liberty Global had also bid for Kabel, but the market always viewed Vodafone as the favourite, and so it has proved.

Kabel 's CDS had rallied in anticipation of a successful Vodafone bid, and today's confirmation led to the two companies' spreads converging fully. Kabel tightened 39bps to 100bps, while Vodafone widened 11bps to 105bps.

The latter firm's single A rating may come under pressure - its leverage will increase from 2.0x to 2.4x - but it has already indicated that it would accept a one-notch downgrade for the right deal. Vodafone already trades with an implied rating of 'BBB', according to Markit data.

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