This CDS update was written by Markit’s Gavan Nolan
Credit outperformed equity today, with the main indices reaching their tightest levels since the beginning of the year. Trading in Europe, however, was thin amid a dearth of news. The Markit iTraxx Europe was trading around 157.5bp, about 7.5bp tighter on the day. Only a handful of names among the constituents widened, among them Telenor and Lafarge. Norwegian telecoms provider Telenor decided to placate its shareholders at the expense of its balance sheet. The firm withdrew a proposed rights issue, the proceeds of which were allocated for funding an investment in an Indian wireless telecoms firm. A combination of cashflow and new debt will now be used to fund the investment. But the firm did make a concession to prudence by scrapping its 2008 dividend. French cement maker Lafarge continued to widen amid negative sentiment in the building materials sector.
Barclays Bank’s spreads extended their rally today following management steps to reassure the markets. The bank wrote an open letter to investors yesterday stating that it remains highly profitable and £8 billion in credit writedowns would not require it to raise more capital. The letter had the desired effect but some investors are staying on the sidelines until the bank releases its results on Feb 9. The banking sector was one of the strongest performers, along with utilities.
It was another busy day for earnings in the US, with results showing some improvement from last week. Verizon Communications’ tightened after it posted solid fourth-quarter earnings. The figures were in line with estimates, with a strong performance in the wireless division offset by a weak showing by the wireline business. Merger partners CenturyTel and Embarq also tightened.
American Express rallied despite a 79% drop in fourth-quarter net profit after the close yesterday. However, the company’s income from continuing operations contained no unpleasant surprises, coming in at 21 cents a share, roughly in line with estimates. AmEx’s spreads have been under pressure amid deteriorating fundamentals. Unemployment is rising rapidly and house prices continue to fall, causing bad debts to increase. Rival credit card company Capital One posted a large net loss last Thursday.
Overall, TMT was the strongest sector, and led the broader market tighter. The Markit CDX IG index rallied by over 10bp to trade at 197.5bp, with tightening names outnumbering those that widened by nearly 12 to 1.