This CDS report was written by Markit’s Gavan Nolan
Lacklustre equity markets did little to slow the relentless rally in credit. The Markit iTraxx Europe index was closed at 92bp, off the sub-90bp levels reached this morning but still over 3bp tighter than Friday’s close. The Markit iTraxx HiVol and Crossover indices tightened by similar amounts in percentage terms, and all of the indices comfortably outperformed their equity counterparts.
The rally was comprehensive, with most sectors sharing in the gains. Defensive names lagged the broader market, though the likes of Unilever and British American Tobacco widened only slightly. Banks, retailers and energy credits all tightened significantly as risk appetite persisted.
Pearson, one of the tightest names in the Markit iTraxx Europe index, rallied after it confirmed that it expects to meet its at least match last year’s profits. The firm said its educational publishing business in the US continued to show strength and it expects this trend to persist this year and next. Pearson’s spread tightened, though they lagged the 10% rise in the stock price.
The credit/equity dislocation was replicated in the US. Stock markets were falling modestly but credit continued to rally. The Markit CDX IG index was trading around 115.5bp, 3bp tighter than Friday’s close. Widening credits were scarce and were easily outnumbered by tightening names. Traditional defensive credits such as Sara Lee, McDonald’s and Bristol Myers Squibb lagged the broader market. Health insurer Aetna also underperformed after it posted a 28% drop in second-quarter profit and significantly reduced its outlook for 2009.
However, the overall earnings trend was mildly positive. Industrial conglomerate Honeywell was among the best performers after it posted solid, if unspectacular results. The company has considerable aerospace and defence operations, with the latter having defensive characteristics. Northrop Grumman, another major defence contractor that posted results last week, announced today that it was selling $750 million in debt. The proceeds will be used to lengthen its debt maturity profile, amongst other things.
Verizon Communications also posted results in line with expectations. The largest telecoms provider in the US tightened significantly after the figures were released. Better than expected earnings from RadioShack gave support to the retail sector. The electronics retailer said the figures were driven by stringent cost-cutting, a trend that typifies the current earnings season.