This CDS report was written by Markit’s Gavan Nolan
The rally in credit lost momentum today as earnings news turned negative on both sides of the Atlantic. The Markit iTraxx Europe index widened to 95.5bp, over 3bp wider than yesterday’s close, while the Markit iTraxx Crossover index was 18bp wider at 655bp. Both indices underperformed falling stock markets, unlike the Markit iTraxx HiVol index. It finished slightly wider, and was tighter for most of the day despite nearly all of its constituents widening.
In a reversal of yesterday’s pattern, defensive credits gained at the expense of cyclical names. Utilities and consumer stables such as Unilever and Sodexho outperformed, while telecoms, retail and banks widened. The latter sector wasn’t helped by Deutsche Bank‘s results. The German bank’s headline figures were strong, showing a 67% rise in net income. Like Credit Suisse and peers in the US, the results were driven by a strong performance from the investment banking division. But the bank also revealed that it had raised its provisions for credit losses to EUR1 billion, almost double the provisions in the first-quarter.
Spanish bank BBVA was another to raise its bad loan provisions. But its results beat expectations thanks to a strong showing from its retail bank division. BBVA’s spreads stabilised around 70bp, making it one of the few names in the sector not to widen.
Credit and equity markets in the US deteriorated, though the movement were less severe than in Europe. The Markit CDX IG index was trading around 116.5bp, about 2.5bp wider than yesterday’s close. But the picture on single manes was more mixed, with more credits tightening than widening among the CDX IG constituents.
Corporate earnings were disappointing compared to last week. Valero Energy was among the worst performers after it posted weak second-quarter results. The 48 cents a share loss was in line with estimates, but the shrinking margins that drove the poor figures are expected to persist in the coming months.
Office Depot‘s results also came in below estimates. The office products retailer reported a second-quarter loss significantly wider than expectations, citing weak demand for its goods. However, the disappointing figures had little impact on the broader retail sector, with rival Staples‘ spreads slightly tighter.
Biotech firm Amgen provided one of the few bright spots. After the close yesterday the company posted second-quarterly results well in excess of expectations. The firm also raised its full-year forecast, sending its spreads – already on of the tightest in the CDX – significantly tighter.
On the macro front, optimism engendered by the first month-on-month rise in US house prices since July 2006 was dampened by consumer confidence falling for the second consecutive month.