European credit derivative spreads eased on Friday for the second day in a row as traders covered short positions and twiddled their thumbs in anticipation of yet more gloomy economic indicators.
The Markit iTraxx Europe index of investment-grade corporate debt eased by 3.4 basis points to 149.25bp, while the iTraxx Crossover of 50 mostly junk-rated debt issuers fell 12bp to 816bp.
A basis point (or one hundredth of a percent) represents €1000 on €10 million of debt, meaning the cost of insuring that amount over five years in the Europe index stands at €149,250. The cost on the Crossover index is €816,000 per annum.
Credit markets did not instantly react to news the Eurozone (excluding France) has officially entered a recession. Later today US October advance retail sales and the consumer confidence index are expected to be ugly.
Analysts from BNP Paribas said the markets were drifting tighter due to technical reasons, with the dip after the aggressive activity seen earlier in the week meaning some were forced to cover their positions – thus pushing spreads down.
For others however the lull could not obscure the distressed levels both major European indices were still trading at. Jim Reid, a credit strategist at Deutsche Bank, told FT Alphaville this morning:
Credit now prices in Armageddon. Equities have just priced in a nasty recession, and one of those two is going to be wrong… I think equities haven’t bottomed yet and I think credit is beginning to form a bottom.
If the credit markets are right equities could be in at an awful lot lower. That doesn’t mean to say its today, tomorrow or next week, but the bottom in the equities markets should be a lot lower if credit markets stay where they are.
In the iTraxx Europe index spreads on Marks and Spencer, the British retailers, widened more than any other name to 397bp, a gain of 32bp. The cost of protecting the senior debt of media company Reuters dropped 4.35bp to 38bp, the biggest improvement seen in morning trade.
In other credit news George W. Bush yesterday said the G-20 meeting in Washington tomorrow would discuss regulation for credit default swaps and other financial instruments.