European credit derivatives markets saw further strengthening Monday morning as investors decided an overly gloomy view of the outlook for retailers and cyclical industries ought to be pared back.
Banks also did better as both credit and equity markets reacted well to a probable capital raising from HBOS, the UK’s largest mortgage lender.
The main iTraxx Europe index of investment grade companies saw its cost of protection drop by 5.7 basis points to 73.1bp by about midday, according to data from Markit’s intra-day service – meaning it now costs €73,100 annually to insure €10m of European investment grade debt in the index over five years.
Analysts at SG CIB, among the most consistently bullish in the market, now reckon the iTraxx is heading for 55bp before three months have passed.
The biggest fall in the cost of protection was for Next, the clothes retailer, which dropped 37bp to 212.7bp, according to Markit. The stock also rose well ahead of its first quarter update on Thursday in spite of one broker cutting its rating.
Other retailers and consumer facing groups that saw a strong improvement in their credit spreads included Marks and Spencer and J Sainsbury of the UK and PPR of France. Also among the best performers in European investment grade credit markets were Glencore, the mining company, Arcelor-Mittal, the steel maker, and chemicals groups Ciba and Clariant.
Banks were on a much firmer footing as news emerged that both HBOS and Deutsche Bank were considering capital raisings, following on from the confirmation that Royal Bank of Scotland would raise £12bn. HBOS and Barclays saw among the biggest falls in their costs of protection with a number of Spanish banks also doing very well. RBS, Deutsch and Credit Suisse also saw improvements.
In riskier credit markets, the iTraxx Crossover list of mostly junk-rated names also tightened strongly, with the index shaving off 19.4bp to 427.9bp by about midday, according to Markit.