Sentiment in credit markets was fragile on Friday, as traders took their lead from equity markets.
The mood turned a shade darker in late morning trade, however, when US bellwether General Electric reported a worse-than-expected fall in profits
“The results and guidance was a disaster,” said Mehernosh Engineer, credit strategist at BNP Paribas. “This is a wake up call for the equity bulls and the V shaped recovery bulls.”
An overnight rally in US stock markets had helped credit markets tighten sharply, after Wal-Mart reported earnings that beat market expectations and Intel and Cisco increased their revenue estimates.
“Equities will likely dictate how far and how fast the [CDS] indices move and that will be dictated by the quality of the Q1 earnings season,” said Suki Mann, credit strategist at Société Générale.
He warned: “Earnings expectations haven’t been significantly lowered and hence many believe that we could be setting ourselves up for some disappointment as a result.”
The iTraxx Europe, which tracks the cost of insuring the debt of investment-grade companies, fell 3 basis points to about 102.7bp. This means it cost €102,700 per year to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover index of mostly junk-rated companies tightened 7bp to about 508bp.