This CDS report was written by Gavan Nolan, analyst at Markit.
The headline European credit indices moved tighter today in tandem with the stock markets. The Markit iTraxx Europe index moved to 105.25bp, about 2.5bp tighter on the day. A sharp fall in the price of crude oil improved sentiment, with the DAX up over 2% and the FTSE back above 5500 for the first time this month.
However, the picture was different in the underlying constituents of the credit index. More than two-thirds of the names widened, led by the major European car makers. The economic outlook is still grim, as reflected in the Markit PMI business surveys last week, and cyclical credits such as Peugeot and Renault can be expected to suffer more than most. Both names have now exceeded the wide levels reached in March.
The energy sector was also in focus. A weekend newspaper report triggered speculation that power company Iberdrola could merge with utility Gas Natural. The latter firm counts Spanish oil firm Repsol as its second-biggest shareholder, and the company’s chairman said he would like to see a merger between the two firms. A merger would have the benefit of keeping the ownership, an important factor in a politically sensitive industry. France’s EDF has expressed interest in Iberdrola in the past, and the newly formed GDF Suez is thought to be looking for overseas acquisitions. The reaction of the CDS market was moderate in comparison to its equity counterpart, where Iberdrola’s stock price increased considerably.