This CDS report was written by Markit’s Gavan Nolan
The European credit markets continued where they left off and rallied strongly this morning. However, the Markit indices gave back some of their gains this afternoon following a tepid opening in the States. The Markit iTraxx Crossover index dipped back below 1,000bp before retracing its steps to trade around just above the watermark. The Main index was more robust, tightening to trade in the region of 189bp. Tightening credits outnumbered those that widened by about eight to one.
News of President-elect Obama’s plans for a massive fiscal stimulus plan have improved sentiment. Industrials and energy-related credits led the market tighter yesterday on hopes they would gain from the investment in infrastructure. But today’s rally has been driven by consumer credits. Car makers were among the best performers after the Bush administration and Congress reached a tentative agreement on a bailout package for the Detroit “big three”. In return for providing a lifeline to the ailing firms, the US government will receive warrants entitling them to significant equity stakes. A “car tsar” will also be appointed, probably by the Bush administration. The tsar will have considerable powers and will be responsible for ensuring the loans are used effectively. A final agreement has yet to be reached but it appears legislation in some form will be passed.
European retailers and consumer goods firms have also tightened today. Apart from hopes that the US fiscal stimulus will rescue the global economy from a protracted slump, there appears to be little reason for optimism. Indeed, data released today in the UK points in the other direction. Industrial production figures for October showed the biggest decline since January 2003. The British Retail Consortium said that sales fell 2.6% in November, its fastest rate in over three years. It is also the first time that the measure has fallen in two consecutive months. Consumes may be waiting for the impending sales or refraining from spending altogether. The answer to this question will be crucial for the health of the UK economy in 2009.
Spreads in the US held up well in the face of mixed stock markets. The Markit CDX IG index was trading around 256bp, over 3bp tighter from Monday. Obama’s infrastructure programme and the expected auto rescue have helped to support the market.
The help has been needed, as today’s news on the corporate front has been disappointing. Freight delivery firm FedEx, widely regarded as a barometer of the US economy, cut its full-year profit outlook. The firm now expects to earn $3.50 to $4.75 a share, down from its previous forecast of $4.75 to $5.25 a share. Markit CDX IG constituent UPS widened on the news. The technology sector also had its share of bad news. Texas Instruments issued a profit warning, cutting its earnings forecast for the fourth-quarter by two-thirds. The company, a solid single A credit, saw its spreads widen to over 150bp, a new record.
Yesterday saw one of the less surprising defaults of the year. Newspaper publisher Tribune Co filed for Chapter 11 bankruptcy protection as it crumbled under the weight of its debt burden. The firm was acquired in a leveraged buyout last year and has been struggling ever since (and well before the LBO). Its CDS spreads have been trading at distressed levels since November 2007. Tribune operates in an industry afflicted by serious challenges, namely the decline in newspaper circulation and falling advertising revenues. Combined with its weak financial profile, this meant that it was always one of the more likely candidates for default.
Tribune is a constituent of the Markit CDX HY 11 index and is a member of off-the-run IG, HiVol and XO indices. A full list can be found here. A credit event auction will likely be held in the near future. Full details will be found shortly on the Markit website.