This CDS report was written by Markit’s Gavan Nolan
European credit spreads bounced back in the afternoon, helped by a strong US stock market. The Markit iTraxx Europe index was trading around 156bp, still over 1bp wider than yesterday’s close but an improvement from the 160bp reached earlier today. The trend was replicated in the crossover index, which was trading around 1047bp. Spreads were again moving in tandem with equity. The Bank of England cut rates by 50bp and the ECB stayed on hold. Both decisions were expected and had little impact on spreads. In the IG index, tightening credits more or less equalled those that widened.
Swiss Re has long been regarded as one of the weaker reinsurers. The company’s dalliance with structured finance and credit derivatives has resulted in painful writedowns and left it with a weakened balance sheet. But its spreads tightened sharply today after Warren Buffett’s Berkshire Hathaway announced its participation in a capital raising effort. Berkshire will invest CHF3 billion and enter into a business agreement with the Swiss firm. The fresh capital, as well as the vote of confidence from Buffett, are clearly a positive development from a credit perspective. But Swiss Re still faces considerable challenges in extricating itself from the structured finance business, and raising more capital could be difficult in the current market. Berkshire has had its own problems with derivatives, despite its owner’s well-documented antipathy to the instruments. The AAA-rated insurer trades tighter than Swiss Re but significantly wider than Munich Re, the more conservative market leader.
German chemical company BASF was among the worst performers today after it announced it is reviewing strategic options for its leather and textile chemicals divisions. “Strategic options” is an established euphemism for a sale, though the company said it is also considering a joint venture. Spreads widened significantly over uncertainty on use of the sale proceeds. A potential reduction in business diversity was also a factor.
In the US, the Markit CDX IG index widened over 200bp before recovering in line with stock markets. Higher than expected unemployment claims were shrugged off as investors focused on the retail sector. Overall, sales figures were poor, with most companies posting large falls in same-store sales. However, in many cases the results were better than consensus estimates, a reflection of rock-bottom expectations.
Bellwether Wal-Mart continued its strong performance, posting a 2.1% rise in sales, just beating the top-end of its own forecasts. Department store Kohl’s saw its spreads tighten after it said sales fell by 13.4% in January. Hardly impressive but better than expectations. Investors were also encouraged by the firm’s bullish forecast for the fiscal fourth-quarter. Limited Brands and Nordstrom, among others, saw their spreads tighten after their sales figures surprised on the upside.
Life insurers underperformed following Prudential‘s disappointing results after the close yesterday.