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CREDIT COMMENTARY
Jan 30, 2013
Spreads widen on Italy woes
Italian credits led the broader market wider on Wednesday amid disappointing earnings and ongoing concern about the banking sector.
Oil services company Saipem saw its stock price drop by nearly 40% in Milan after it slashed its full-year earnings forecast by more than half. To make matters worse, the Italian regulator Consob said it was looking into a large share sale made a day before the profit warning.
Saipem doesn't trade in the CDS market, but Eni, its largest shareholder, does. It's spreads widened 11bps to 130bps following the news. This is a significant move in percentage terms, but the ECB induced rally in peripheral credit over the last six months means that Eni is still trading more than 100bps tighter than last summer's peak.
Moreover, French firm Technip, one of Saipem's main competitors, saw its spreads widen 6bps to 125bps.
Italy's Banca Monte dei Paschi has had a torrid 2013 so far, and its many problems - derivative losses, weak capital, and political scandals - are unlikely to be resolved anytime soon. The turmoil has led to Italian banks underperforming, and they continued to push the Markit iTraxx Senior Financials index wider.
In the broader market, the main focus was on GDP figures in Spain and the US. Both were worse than expected and contributed to the negative sentiment in the credit markets today. Spain's economy shrank by 0.7% in the fourth-quarter and 1.37% over the year as a whole.
The -0.1% figure for the US was even more surprising. A sharp decline in government spending - mainly defence - and a fall in inventories accounted for the weak number.
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