Autos widen as oil prices rise

Wed Jul 21, 2004

NEW YORK, July 21 (Reuters) - Rising oil prices may trump any good news for General Motors Corp. (GM.N: Quote, Profile, Research) and Ford Motor Co. (F.N: Quote, Profile, Research) , however many cars they sell.

Both companies' credit spreads initially widened when Ford reported its second quarter results on Tuesday. Ford doubled its earnings from last year, but auto sales were disappointing, and most profit growth came from Ford's finance arm.

Investors fretted about how sustainable those earnings are as interest rates rise and making money in the financing business becomes more difficult.

On Wednesday, both companies' credit spreads initially tightened, as General Motors reported a 49 percent gain in second quarter earnings, in part because of strength in the auto business. The company admitted that North American profits were marginal for the quarter, but said July sales appear strong.

But later in the session, spreads gave back most of their gains as oil prices rose and stocks sold off.

Rising oil prices threaten to slow down demand for cars, and also slow down the economy and drag on corporate earnings. Some investors use auto credits as a proxy for the overall market, so when profit growth is threatened, spreads on Ford and GM credit derivatives can widen.

"It's hard to say how car sales will do, but as long as oil prices rise, auto spreads will widen," a trader said.

That makes predicting the direction of auto credits difficult. If oil prices fall dramatically, the broad corporate profit outlook could improve, and auto spreads could narrow. If oil prices stay high, spreads could widen further.

Oil prices rose globally on Wednesday, after a report showed that U.S. crude oil stocks fell unexpectedly. U.S. light crude oil futures for September delivery closed at $40.58 a barrel, above the $40 a barrel threshold that gets many traders concerned.

Buying protection against Ford Motor Credit defaulting on its debt for five years in the credit derivatives market started on Monday at around 168 basis points, closed on Tuesday around 175 basis points.

On Wednesday, spreads narrowed to as tight as 170 basis points before oil prices rose. Spreads then gave back much of their narrowing, closing around 174 basis points, or 1 basis point tighter.

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