This CDS report was written by Markit’s Gavan Nolan
European credit markets were relatively volatile today with investors in an uncertain mood. The conventional wisdom – at least among market participants – that the global economy is set to rebound has been challenged this week by disappointing economic data. Though the prospect of a depression looks to have been averted, both credit and equity markets have reversed as risk aversion has returned to the agenda. The Markit iTraxx Europe is trading around 133bp, an improvement from the 138bp reached this morning and just under 1bp tighter than yesterday’s close. The Crossover fared better, recovering from earlier widening to trade 9bp tighter at 800bp. HiVol, like yesterday, was the laggard, 4bp wider at 264bp.
The sell-off was comprehensive, with widening credits outnumbering tightening names by around four to one. However, one sector did withstand the correction. Telecoms tightened after BT posted its full-year results. The UK telecoms results were far from impressive – a pre-tax loss of £134 million. The poor performance was driven by Global Services, its struggling IT services division. But credit investors took encouragement from the firm’s cost cutting plans. BT announced that it will cut its dividend by 60% and scythe 15,000 workers from the labour force. The company said its expects to make cuts in operating costs and capital expenditure of more than £1 billion in the coming year to improve cash flow.
In the US the picture was more mixed. Equity markets were up by around 1%, and the Markit CDX IG, while underperforming stocks, was under 1bp wider at 154bp. But the vast majority of the index constituents widened, reflecting the negative sentiment returning to the market this week. Disappointing weekly jobs data, showing 32,000 more people claiming benefits compared to the previous week, weighed on spreads.
Energy and railroads were among the worst performers, as was Staples. The office supplier continued to widen following the weak retail sales data yesterday. Department store Kohl’s widened despite posting better than expected results and raising its full-year forecast. Bellwether Wal-Mart‘s earnings were in line with expectations but its revenues came in below estimates.