“There were further signs of contagion across the eurozone on Thursday ahead of a European Central Bank meeting, as investors sold government bonds of many peripheral eurozone countries, sending yields higher.
Fears of default by companies in the eurozone periphery also rose sharply, offering signs the contagion was spreading to the corporate sector.
Stock markets in Europe were also hit with Portugal and Spain worst affected as financials led the charge lower.
The western Europe Markit SovX index, which measures the cost of insuring against the risk of default, widened beyond 100 basis points for the first time amid heavy buying in the sovereign credit default swap market. CDS spreads on Portugal hit record highs, up 21 basis points to 215 basis points, while
Greek credit default swaps rose 16 basis points to 407 basis points, heading closer to records of 421 basis points reached in January.
“The latest catalyst was [Wednesday’s] bond auction in Portugal which was scaled back and which has re-ignited fears that the likes of Portugal and Greece will not be able to fund their deficits without a bail out,” said Gavan Nolan, credit analyst at Markit.
These concerns have started to spread to corporates in peripheral eurozone countries with CDS spreads on companies such as Portugal Telecom, Telefonica and Hellenic Telecom rising significantly in strong trading volumes. CDS spreads on Portugal Telecom jumped 30bp in early trade to 150bp, their highest levels since April last year.
Portugal’s 10-year bonds jumped 8 basis points to yield 4.74 per cent. Ten-year Spanish sovereign yields climbed 2 basis points to 4.12 per cent. Greek 10-year bond yields rose 6 basis points in early trade to 6.76 per cent but later recovered with yields narrowing to 6.67 per cent, a fall of 3bp on the previous close. Ten-year gilts rallied, with yields 2bp lower at 3.88 per cent, ahead of the Bank of England meeting later in the day.
The euro fell below $1.385 against the dollar, hitting lows last seen in June 2009.
“The euro was initially buoyed yesterday [Wednesday] by the European Commission’s endorsement of the
Greek debt plan. However, it slipped back after Portugal cut a planned treasury bill issue and Spain disclosed that its budget deficits for the next three years will be higher than forecast. It would appear the sovereign debt problem is turning into a contagion in the eurozone,“ said Michael Hewson of CMC Markets.
Among stocks, Portugal’s PSI 20 was trading 3.6 per cent lower, with financials the worst performers, down 5.3 per cent. Spain’s Ibex was 2.3 per cent lower with financials again the biggest fallers, down 3 per cent.
London’s FTSE 100 was largely a sea of red having been up as much as 0.3 per cent in early trade, trading 0.9 per cent lower. The FTSE Eurofirst 300 was down 1 per cent. (...)" in
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