This CDS report was written by Markit’s Gavan Nolan
European CDS indices gave back some of their gains this afternoon following a lacklustre opening in the US. The Markit iTraxx Europe index threatened to break through the 100bp barrier this morning, bolstered by investors’ continued appetite for risk. The dollar lost ground as money flowed out of the safe-haven currency – it still retains that status – and into higher yielding assets. In a related development, oil touched $71 a barrel, its highest level for nearly eight months. However, the investment grade index retreated later in the day after US stocks failed to build on yesterday’s positive momentum.
The rally in single names was broad-based, with defensive names tightening as well as the usual cyclical credits. Financials were outperforming after the TARP repayment announcement yesterday. 10 banks, including JPM, GS and MWD, were allowed to repay a combined total of $68 billion to the US Treasury. The move appears to signal a stabilisation in the US banking sector, though the congressional oversight panel recommended further stress tests given the steeper than expected rise in unemployment. European banks tightened, as did insurers and reinsurers. Munich Re‘s spreads are now at their tightest level in over a year, outperforming others names in the sector.
Swedish banks rallied after the authorities said that the sector would be able to withstand large losses from the Baltic region. Swedbank and SEB, in particular, have widened in recent days due to their exposure to Latvia’s ailing economy. Latvia’s currency has been under extreme pressure and there are serious doubts over whether a devaluation can be avoided. Sweden’s Riksbank announced that it was taking a EUR3 billion loan from the ECB to ensure financial stability.
In the US credit tracked stocks and moved slightly wider. The Markit CDX IG index was about 1bp wider at 124.25bp, giving back early gains. The picture among the underlying constituents was somewhat different, with tightening credits easily outweighing names that widened. In common with Europe, the rally was broad-based with both defensive and cyclical names tightening. The technology, media and retail sectors all performed strongly. A hike in profit expectations from Home Depot supported the latter sector. Banks, as expected, continued to tighten following the news on TARP repayments.
The energy sector was conspicuous by its absence from the rally, with one name in particular contributing to the underperformance. First Energy has widened sharply in recent days and continued to do so today. There is no specific news on the Ohio-based utility, though there are rumours that it is facing a downgrade to junk unless it manages to raise funds. Traders are also suggesting that correlation desks have been caught with long positions and are scrambling to hedge. FE’s spreads compared to its peers highlights the idiosyncratic nature of the recent movements.