Syndicate officials could point to few positives this (Tuesday) morning as the market opened weakly, although one said that sentiment had been improving prior to a Deutsche Bank profit warning and that a focus on Dexia could bring much needed clarity of the group’s future.

Benchmark covered bond supply is unlikely to hit the market this week, with issuers and investors on the defensive, according to syndicate officials.

One said that markets had firmed up going into yesterday’s (Monday’s) close, but that they had opened considerably weaker this morning, with little positive to build a recovery on.

Another said that improvement had been in sight before Deutsche Bank issued a profit warning.

Belgian and French finance ministers Didier Reynders and François Baroin

Uncertainty surrounding Dexia also informed market sentiment this morning, after the group’s board of directors announced that it has asked the chief executive to open talks with the relevant governments and supervisory authorities “to prepare the necessary measures to resolve the structural problems penalising the Group’s operational activities, and to open up new prospects for the development of its historical commercial franchises in Belgium and France”.

The syndicate official said that a drop in the group’s share price of 25% had prompted many questions from investors about the impact of different restructuring options on the group’s assets and covered bonds. The focus on Dexia “may not be a bad thing” if it brings resolution, he added.

Royal Bank of Scotland analysts pointed out that the French and Belgian finance ministers this morning indicated that the governments would provide state guarantees of financing raised by Dexia, but that the statement leaves much unexplained.

“The positive announcement from the French and Belgium government regarding their willingness to support Dexia should help Dexia’s covered bonds and should contribute to stabilisation of the markets ahead of the ECB announcement on Thursday,” said the analysts.

Market participants are on the sidelines ahead of a meeting and press conference of the Governing Council of the European Central Bank on Thursday, which has become a greater focus of attention than usual following media reports that the ECB is considering a new covered bond purchase programme.

Syndicate bankers played down the impact that any disappointment on this front would have, with one saying that he did not expect silence on the subject of a purchase programme by the ECB to lead to “a massive outcry”.

“Everyone knows it’s pure speculation,” he said, adding that there was more room for disappointment with respect to the ECB’s decision on interest rates.

Another syndicate banker said that if the ECB does not make any, or sufficiently clear, pronouncements on a covered bond purchase programme then the extent of any disappointment would depend on other measures taken by the central bank.

He said that the market could be slightly worse off because some accounts had positioned themselves for spread tightening.

Another said that silence from the ECB on covered bonds on Thursday would at least mean that market participants “would be dealing with the facts”, with real money investors, for example, able to form a view again.