This CDS report was written by Markit’s Gavan Nolan
European credit lost ground today after disappointing data from the US. The Markit iTraxx Europe index closed around 91.5bp, just under 1bp wider on the day. The Markit iTraxx Crossover index was around 0.5bp wider at 598bp, while the Markit iTraxx HiVol index fared better, tightening slightly to close at 163bp.
The picture was looking rosier this morning. Stocks were up and credit spreads were tighter after Markit PMI data showed the European service sector continuing to recover. The CIPS/ Markit UK Services PMI posted its sharpest gain for nearly a year and a half, with the business activity index above the crucial 50 no-change mark for the third consecutive month. Following on from the strong manufacturing report earlier this week, the data points towards a resumption of growth in the third-quarter. The eurozone PMI also resumed its upward trend after a pause in June. The index reading of 45.7 was the highest since October 2008, though it still indicated a sector in contraction.
But the positive sentiment was shaken by news from abroad. The ISM non-manufacturing index, a diffusion survey similar to the Markit PMI, fell unexpectedly in July to 46.4 from 47. It was the 10th consecutive month that the index indicated a contraction in the US service sector. A worse than expected ADP employment report also weighed on the markets. Spreads widened and stocks fell in Europe after the announcements.
The reaction in the US was more subdued. The Markit CDX IG index was trading around 112.5bp, about 0.5bp tighter than yesterday’s close. Tightening credits outnumbered names that widened, with consumer goods one of the sectors in focus. Kraft Foods helped push spreads tighter after it posted better than expected quarterly results. The 56 cents a share net income beat consensus estimates and the firm also raised its full-year forecast, continuing the trend set by food companies General Mills and Kellogg in recent weeks. The news helped offset disappointing results from Proctor & Gamble.
The technology sector, one of the strongest performers in recent weeks, widened as investors took profits following the ISM report.