This CDS report was written by Markit’s Gavan Nolan
European credit markets outperformed their equity counterparts today in a rally that could well be short-lived. The Markit iTraxx Europe index tightened by 4.5bp to close around 154bp, with HiVol posting a similar gain in percentage terms. Crossover tightened modestly and was more in tune with the stock market. In the investment grade universe telecoms outperformed, led by British Telecom. The UK telecoms provider tightened despite posting an 11% fall in pre-tax profits for the second-quarter. Investors welcomed BT’s announcement of cost cuts, including the loss of 10,000 jobs. Other TMT firms have announced headcount reductions and Vodafone is expected to follow suit in the coming weeks.
The price of crude oil fell to its lowest level for nearly two years as the outlook for the global economy worsened. The OECD became the latest organisation to downgrade its forecasts and called for the G20 countries - meeting this weekend - to implement a coordinated fiscal stimulus plan. Most companies will welcome the oil price falling. Apart from, that is, the oil producers. The likes of Repsol and Total were among today’s widening credits. Energy groups EnBW and Iberdrola also widened after they announced the sale of new debt. Like RWE earlier this week, the issues were priced at attractive rates to ensure investor interest.
In the US, the picture was somewhat different. After a solid start the Markit CDX IG index has widened 6bp to around 206bp, with deteriorating names outnumbering tightening credits by four to one. Insurers and retailers were to blame for the weak performance. The Bush administration’s change of tack on TARP - the funds will no longer be used to buy distressed and illiquid assets from financial firms - has created uncertainty and unnerved markets. The focus now seems to be on consumer credit, and Democratic politicians are pressing for TARP to be extended to car makers. It is unclear whether insurers will get funds to bolster their balance sheets.
Retail bellwether Wal-Mart pulled the sector wider after it beat earnings expectations but cut its profit outlook for the full-year. The company said third-quarter profit from continuing operations came in 77 cents a share, above its own forecasts and those of the market. But it said it now expects annual earnings to be in the range of $3.42 to $3.46 a share, down from its previous forecast of $3.43 to $3.50 a share. Department stores such as JC Penney and Nordstrom - reporting tomorrow and after the close today respectively - have suffered from competition from discount retailers and declining consumer confidence. Both were among the biggest widening names today.
