This CDS report was written by Markit’s Gavan Nolan
European credit continued to lose ground as another round of grim economic data reminded investors that all bear markets have rallies. The Markit iTraxx Europe index was around 2bp wider at 191bp, while the Markit iTraxx Crossover index underperformed at 1134bp, 32bp wider than yesterday’s close.
Unemployment in the UK crossed the 2 million mark and the unemployment rate hit 6.5%, its highest rate in more than 11 years. The number of people claiming unemployment benefit – a different measure than the widely quoted ILO measure – rose by 138,400 to 1.39 million. This was the largest monthly increase since records began in 1971.
While the figures were hardly a surprise – the press had their stories at the ready – it highlighted the flimsy basis of the recent rally. Unemployment is a lagging indicator but survey data and official figures suggest that the current quarter is likely to be as bad as Q4 2008. The number of jobless will inevitably rise, with some predicting that it will exceed 3 million before the effects of any monetary and fiscal stimulus are felt. A similar situation is brewing in other major European economies. Though credit spreads are forward looking indicators and should rally before the economy picks up, they will find it difficult to sustain momentum in the near-term amid the plethora of negative headlines.
Nonetheless, there were some names in Europe that managed to tighten today. Italian bank Unicredit rallied after it posted better than expected 2008 results. News that the bank is seeking EUR4 billion in state aid from the Italian and Austrian governments supported the rally. Unicredit is a major player in eastern Europe, directly and through its Bank Austria subsidiary. Concerns that the downturn in the region will result in major losses for the bank caused its spreads to widen sharply in February and earlier this month.
Credit deterioration in the US was modest in comparison to Europe. After a shaky opening, the Markit CDX IG was trading around 236.5bp, more or less flat from yesterday’s close. However, there was plenty of volatility among the single names.
Darden Restaurant was the star performer after it posted better than expected quarterly results. The firm provided further encouragement by raising its fiscal 2009 sales and earnings growth forecasts. Darden’s results highlight the importance of focusing on value in the current economic climate, and its spreads are now at their tightest levels since September.
The insurance sector continued to widen as the recent rally faded away. Life insurers MetLife, Prudential and Hartford Financial, all returned to trading upfront as the fragile positive sentiment in the sector dissipated. Insurance broker Marsh & McLennan was among the biggest widening credits in the IG index.
Industrial names such as Caterpillar also widened after the World Bank cut its forecast for growth in China to 6.5% from 8%. Caterpillar and other firms in construction and materials rely on China as a major export market.
IBM’s spreads widened slightly on news that it is in talks to buy smaller rival Sun Microsystems.