Friday saw a string of European companies report decent first-quarter results, cheering credit markets and lowering the perceived riskiness of European corporate debt.
The cost of insuring the debt of Swedish telecoms company Ericsson fell back dramatically after the company reported results that beat the market’s (low) expectations. Its credit default swaps shed around 30 basis points to 180bp, while its shares jumped more than 20 per cent.
Valeo, the French car parts maker, also saw its debt-protection costs fall – by 11bp to 213bp – after its results overshot forecasts. This means it now costs €213,000 each year to protect €10m of Valeo’s debt against default over five years.
But lest we get too enthusiastic, the credit team at BNP Paribas (regular harbingers of doom) urged caution:
Forward indicators point to the credit crunch starting to have a major impact on consumption and capital spending plans. We believe that the true test for earnings growth for non-financials will come in Q3, when “V” shaped recovery assumptions are challenged and global growth has decelerated further.
In the wider market, the iTraxx Europe, which tracks the cost of insuring the debt of investment-grade companies, dropped 5.6bp to about 79.5bp.
The iTraxx Crossover index of mostly junk-rated companies fell 10.2bp to about 456bp.