This CDS report was written by Markit’s Gavan Nolan
European credit indices recovered their losses from Friday in an uncertain start to the year. The Markit iTraxx Europe index rallied by about 4bp in a quiet start to what promises to be an eventful week. Cyclical sectors such as autos and luxury retailers were among the best performers, despite the dearth of positive news. The Markit iTraxx HiVol outperformed as a result. Banks were also tighter, with spreads back to levels last seen at the beginning of December.
2009 was always going to be a year laden with defaults, and the coming weeks are likely to be filled with several failures. Smaller names in the retail sector will go into insolvency as they fail to pay rent and other costs. Most of these, however, don’t trade in the CDS market. LyondellBasell, a Dutch chemicals group, is a different proposition. The firm, a constituent of the Markit iTraxx Crossover index, is trading at over 80 points upfront, indicating a high probability of near-term default. Lyondell has been crushed by high raw materials costs and slumping demand for its products, leaving it unable to service its high debt burden. Lyondell’s dire liquidity position has forced it to consider a bankruptcy filing, and a statement on its future can be expected in the coming weeks, if not days. Ineos Group, another struggling chemicals firm is also trading at distressed levels. The firm is trying to negotiate covenant waivers and the negative news from Lyondell could weaken its position.
In the US, the Markit CDX IG index moved wider in tandem with falling stock markets. Expectations of poor car sales figures for December weighed on the broader market. However, the underlying constituents of the index painted a different picture. Tightening names outnumbered those that widened by more than four to one. In fact, the only sector to show significant widening was the retail sector. Tomorrow’s ISM non-manufacturing survey for December will be closely watched for clues on the direction of the domestic economy. However, Friday’s non-farm payrolls report will dominate the week. Another abysmal figure is expected, possibly in excess of 500,000 jobs lost. The unemployment rate could also reach the key 7% level.