This CDS report was written by Markit’s Gavan Nolan
European credit indices widened today, ending a four-day winning streak. The Markit iTraxx Europe index closed at 115bp, some 6bp wider than Wednesday. Events across the Atlantic provided the catalyst in a market that was already losing momentum. The much anticipated US non-farm payrolls report showed the economy losing 467,000 jobs in June, far higher than expected. The unemployment rate continued to rise, and at 9.5% is the highest for 26 years. Average hourly earnings were flat, boding ill for consumer spending. Overall the report was dire, and will only add to the number of investors expecting an anaemic recovery in the second-half of this year.
The bad news was not confined to the US. Eurozone unemployment in May rose to 9.5% from 9.3% in April, higher than the 9.4% expected and a 10-year high. The lagging nature of the labour market means that the number of jobless is set to rise this year and maybe into next year. The UK, expected by many to be the first out of recession, received a blow today after the CIPS/Markit Construction PMI – a key forward-looking indicator – showed a worsening in the rate of contraction in June. Previous months had suggested the decline in the sector was levelling off. The survey showed jobs continuing to be shed at a considerable rate, indicating further rises in unemployment in the months ahead.
The ECB kept rates at 1% but the inaction was expected and investors paid little heed. Among single names the session was mixed, with banks the worst performing sector. French supermarket group Carrefour gave back some of its gains from yesterday. The company’s spreads tightened sharply yesterday after the firm announced a radical cost-cutting programme. The three-year plan will produce EUR4.5 billion in savings, mainly through introducing a new computer system and reducing its inventory holding period to 30 days from 37.
Ireland was wider after Moody’s downgraded its rating to Aa1 from Aaa. The action, prompted by Ireland’s deteriorating fiscal position and steep economic contraction, was no great surprise. S&P and Fitch downgraded the sovereign earlier this year, and even these action were well behind the sovereign CDS market. Ireland is currently trading equivalent to a single A credit, and has been for some time.
In the US, the Markit CDX IG index was trading around 137bp, about 6bp wider than yesterday’s close. The sell-off was broad-based, with few sectors escaping. Defensive names such as Pfizer held up relatively well, while cyclical names – notably retailers – widened disproportionately.
Lear Corp, a major US auto parts supplier, filed for Chapter 11 bankruptcy protection yesterday. The move was inevitable given the GM and Chrysler bankruptcies and slumping US auto production. Lear is the latest in a long line of US auto parts supplier to go bankrupt and it probably won’t be the last. The company was a constituent of several indices in the Markit CDX family and details of credit event auctions will be announced shortly.