This CDS report was written by Markit’s Gavan NolanAfter a shaky start, European credit markets recovered this afternoon with the assistance of news from the US. Stronger than expected consumer confidence figures from the states helped to assuage nerves created by nuclear and missile tests in North Korea. The Markit iTraxx Europe index was trading around 123bp, slightly tighter on the day and an improvement from the widening seen this morning. A similar pattern was evident in the HiVol and Crossover.
The consumer confidence numbers reignited hopes that the US consumer can lead the world out of recession. The Conference Board’s sentiment index rose from a revised 40.8 in April to 54.9 in May, the biggest monthly gain since 2003. The figure was far higher than expected and helped offset weak US house price figures.
In Europe, the consumer was also showing strength. French consumer spending on manufactured goods rose by more than expected and the German consumption component of GDP showed a 0.5% rise. However, the rest of Germany GDP posted sharp falls, and it is questionable whether the consumer can stay resilient in the face of rising unemployment. A busy week of economic releases – including French consumer confidence (Weds) and eurozone leading indicators (Thu) – could cause more volatility.
Single names reflected the mixed economic picture. Widening credits comfortably outnumbered names that tightened, with telecoms and banks among the worst performers. Deutsche Telekom widened after it announced plans to sell EUR500 million in five-year bonds. The German group trades wider than many of its European peers.
Porsche was another German name to widen. The car maker revealed that it had taken a EUR700 million loan from Volkswagen, its larger rival that it has been trying to takeover for some time. Its acquisition efforts have left it with a considerable burden, and uncertainty over its future has caused significant volatility in its spreads. Volkswagen was also wider after the loan news emerged.
French food group Danone was one of the few names to tighten after it announced a rights issue. The company said the EUR3 billion issue will reduce net debt to 1.6X EBITDA from 2.8X EBITDA. Though the announcement was welcomed by credit investors, gains were tempered by the firm’s pessimistic comments on the economic outlook.
In the US, credit markets shrugged off weak house price data and reacted positively to the better than expected consumer confidence figures. The Markit CDX IG index was trading around 142bp, 5bp tighter than the previous close. Tightening names outnumbered widening credits, with financials the best performing sector.