Lacklustre earnings fuel negative mood

A slew of disappointing earnings reports gave risk aversion the upper hand in Europe today.

Pharmaceuticals, typically solid performers and defensive in nature, were under scrutiny on Thursday after Astrazeneca posted a sharp drop in sales and pre-tax profits.

To make matters worse, the company's CEO warned that 2013 sales would shrink by "a mid-to-high single digit percentage" and earnings per share would decline by an even greater amount.

The news sent Astrazeneca's spreads 7bps wider to 68bps, its widest level since July last year. Of course, this is still indicative of a strong credit standing, but Astrazeneca is a AA-rated company and the recent deterioration means it trades with an implied rating of single A.

Roche, one of Astrazeneca's main competitors, trades at just 40bps and has tightened significantly over the last year. Its deleveraging efforts were rewarded today with a one-notch upgrade to 'AA' by Fitch.

Pharmaceuticals weren't the only sector to depress sentiment. Banks were under pressure after Banco Santander's fourth-quarter net profits came in well below expectations. The Spanish bank also said its bad loan ratio continued to rise and now lies at 6.74%.

Santander's spreads widened 12bps to 265bp. Deutsche Bank's results were also underwhelming and its spreads widened 4bps to 104bps.

A big day for economic data tomorrow probably added to the edgy mood. The US non-farm payrolls report will be crucial in forming expectations for QE, while the Markit PMIs and ISM surveys should give important clues as to how the world's major economies have started 2013.

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