This CDS report was written by Markit’s Gavan Nolan
European credit indices gave back some of their gains this afternoon following disturbing news from the US. This morning saw a continuation of the recent rally, with the Markit iTraxx Europe index more than 12bp tighter at one point. But the strong performance could not be sustained after US stock markets opened down and European stock indices followed suit. The ADP employment survey showed that the US private sector shed 693,000 jobs in December, far higher than expected. However, the methodology of the report was changed this month and it is difficult to tell whether this has had a meaningful effect on its reliability. Technical issues aside, the size of the figure bodes ill for the crucial non-farm payrolls report this Friday.
Disappointing corporate news - perhaps a precursor of the coming earnings season - also weighed on spreads. Alcoa’s spreads widened after it announced measures aimed at bolstering its balance sheet. The aluminium producer said it will cut capital expenditure, reduce headcount and dispose of assets in response to a decline in demand. The company has been a victim of the economic downturn and the consequent drop in metal prices. This trend is likely to continue, and more drastic measures may be needed to maintain investment grade ratings in the medium-term.
Time Warner was one of the worst performers after it announced a $25 billion impairment charge for the fourth quarter. The company now expects to take a full-year net loss for 2008 rather than the profit of $1.04-$1.07 a share it predicted late last year. Time Warner Cable, which the parent company plans to dispose of this year, accounted for most of the charge. Spread widening, however, was negligible, reflecting the non-cash nature of the charge.
In fact, spread widening was negligible throughout the market. In Europe, deteriorating names were a rare species, despite the dire news emanating from the US. In light of the declining stock indices short covering by credit investors no doubt contributed. The Markit HiVol index outperformed the Main, driven by UK retailers and continental car makers. Marks & Spencer posted strong gains following its eagerly awaited trading update. As expected, the company announced weak sales figures for the latest reporting period. But the avoidance of any nasty surprises led to its spreads tightening sharply. Rival high street chain Next also tightened.
It was similar story in the US. The Markit CDX IG was slightly wider at 197bp, a fairly resilient performance given falling stock prices. But the underlying names were even stronger. All but a handful tightened, with the technology and media sectors continuing their recent rally. There was little in the way of fundamentals to explain the rally, and a combination of sentiment and short covering is likely behind the tightening.
LyondellBasell bowed to the inevitable and filed for US bankruptcy protection. Its US subsidiary, Lyondell Chemical, was a constituent of Markit CDX HY indices series 2-9 and LCDX. Millennium America Inc, a subsidiary of Lyondell Chemical, was a constituent of CDX HY series 2-3. Equistar Chemicals, another subsidiary, has also been triggered under the bankruptcy filing. Information on credit event auctions will be forthcoming on www.creditfixings.com and http://www.markit.com/information/products/category/indices/cdx.html
Finnish bathroom products maker Sanitec is also on the verge of default. The company has reportedly failed to receive lender approval to defer interest payments. Sanitec is a constituent of LevX Series 3 and its default could trigger Europe’s first LCDS auction.
