This CDS report was written by Markit’s Gavan Nolan
Investment grade European credit was resilient today in the face of declining stock markets.
The strong performance in financials continued, with yet another bank providing a positive surprise. Credit Suisse posted second-quarter net income of SFr1.2 billion, down 62% from the same period last year. However, the results were a significant improvement from the previous quarter, when the Swiss bank was forced to take write-downs on its trading book due to mis-marking of positions. Investors were also encouraged by the reduction in its leveraged finance portfolio, down to SFr14 billion from SFr21 billion, evidence of the improved conditions in that market. Credit Suisse’s spreads were trading around 70bp, 4bp tighter on the day.
The news wasn’t all good, though, as the sharp fall in the stock markets indicates. UK retail sales fell 3.9 per cent in June, the biggest drop on record. The figure more than reversed the 3.6 per cent jump in May, an increase regarded by many as anomalous. However, retail credits held up well, mainly thanks to better than expected results from Kingfisher. The home improvement retailer, a weak performer over the last 12 months due to the UK housing slowdown, attributed the increase in sales to the warm weather compared to last year. Spreads were trading around 310bp, 15bp tighter than the previous day.
A profit warning from Daimler did little to unnerve the markets. The car maker’s spreads were flat on the day. The worst performing credit came not from the cyclical sectors, but from the sedate world of utilities. The UK gas supplier is thought to be in the final stages of talks with EDF over the two firms acquiring British Energy. The bid is thought to be in region of EUR15 billion to EUR16 billion, but it is still unclear how the two acquirers would structure the deal. Reports have emerged that EDF may go it alone in buying the UK nuclear energy company.
The pattern was replicated in the US, with stock markets falling significantly but the main credit indices flat. On the economic front there was little cause for optimism, with jobless claims increasing and sales of existing homes falling to their lowest level in a decade. An $8.7 billion loss from Ford, larger than expected, was met with equanimity by credit investors.