This CDS report was written by Markit’s Gavan Nolan
European credit markets rallied strongly following the Federal Reserve’s dramatic intervention yesterday. The Markit iTraxx Europe index was trading around 184.5bp, about 9bp tighter than the previous close. Crossover also rallied but was lagging behind the main index. Financials were the best performing credits, and the heavy weighting of banks and insurers in the main index accounts, at least partially, for its outperformance. The equity markets, however, were less buoyant. After a strong morning session, they gave back some of their gains after a weak US opening.
UBS stood out in a resurgent financial sector. The Swiss bank announced an offer to buy back EUR1 billion of its subordinated debt, a measure aimed at boosting its capital position. UBS is only offering 62.5 cents in the euro lower tier two notes, which could deter some investors from participating. Nonetheless, the news, along with the quantitative easing announced by the Fed yesterday, pushed bank spreads tighter across Europe. The Markit iTraxx Senior Financials index was trading around 174bp, 12bp tighter on the day, while the sub index was 37bp tighter at 360bp.
Overall, tightening credits outnumbered names that widened by about seven to one. Cyclical credits outperformed, while defensive names fared less well. German steelmaker ThyssenKrupp was one of the few names to widen after it forecast a fiscal second-quarter loss. The firm blamed a severe slump in demand for steel and other materials. The comments echoed that of Nucor, a US rival that cut its outlook earlier this week.
The picture in the US was much the same, with credit outperforming equity. The Markit CDX IG index was about 1% tighter at 226.25bp, while the Dow and S&P were 1% lower. Though there are fundamental justifications for the rally, technical factors may also be germane. The main credit indices are rolling tomorrow, and in the past there has been some evidence of investors closing their short credit risk positions before buying the new contract. This can have the effect of causing spreads to tighten on the index if more short investors prefer to roll. An increase in the theoretical basis yesterday provides some support for this view.
Widening credits were few and far between in a broad-based rally. Oil-related names outperformed as the price of crude rose above $50 a barrel for the first time since November. Oil rig operator Transocean tightened more than most.
However, FedEx gave a reminder of t he dire state of the economy. The company, seen as a barometer of the US economy, widened after it issued a weak outlook for the fiscal fourth-quarter.