This CDS report was written by Markit’s Gavan Nolan
European credit indices were flat on the day, tracking a mixed performance by stock markets. Spreads have proved resilient to bad news in recent weeks, and today was no exception. Retail sales in the UK fell by 1.9% in February, far more than the 0.4% consensus forecast. The figures took the annual growth rate to 0.4%, its lowest rate since 1995. The official retail sales data is notoriously volatile, and figures in previous months showing rising sales have been met with skepticism. The latest figures are more in tune with survey data and anecdotal evidence.
There was more bad news from Next. The UK retailer posted a 14% decline in annual pre-tax profit, roughly in line with market expectations. The firm was bearish about the current year, stating that the first-half will be particularly tough. Sales from its stores open at least one-year are expected to fall by between 6% and 9% during the period. Next’s stock price declined after the results were announced. Credit spreads, however, tightened slightly, reflecting the resilience prevailing in the market at the moment. Disappointing results from H&M did little to dampen sentiment in the broader retail sector.
German carmaker Daimler saw its spreads reach their tightest levels since last October in a strong session for autos. The firm received a boost earlier this week after an Abu Dhabi-based fund invested EUR1.95 billion in the company.
Elsewhere, ThyssenKrupp continued to widen as yet another steelmaker issued a bleak outlook. Salzgitter said it expects its cash position to deteriorate over the year and will be reducing its investment budget and dividend in an effort to reduce costs.
US credit markets were similarly indifferent to negative economic data. Jobless claims rose by 122,000 to a seasonally adjusted 5.56 million, another new record. The figures point towards a dire non-farm payrolls report next week and a further rise in the unemployment rate (already at 8.1%). But both the credit and equity markets were non-plussed, rallying by around 2%. The Markit CDX IG index was trading around 179bp, with tightening credits outnumbering names that widened by about seven to one.
Industrial credits, such as Caterpillar, continued to tighten following the strong durable goods report yesterday. Tech names also outperformed, with Dell tightening after electronics retailer Best Buy – a major Dell stockist – posted better than expected earnings.
However, the banking sector failed to reap the benefits of the bullish market sentiment. Spreads widened significantly after Treasury Secretary Tim Geithner made his testimony to the House financial services committee. Geithner made it clear that a more “conservative regulatory regime” is needed and financial institutions are going to face more scrutiny. Fears that intrusive, perhaps populist measures will be introduced caused bank spreads to widen after the testimony. Moody’s downgrading of Bank of America and Wells Fargo also weighed on the sector.