This CDS report was written by Markit’s Gavan Nolan
European credit and equity markets rallied in tandem today, helped by a surprise intervention from the Bank of England. The Markit iTraxx Europe index was trading around 90.5bp, about 1bp tighter on the day. The Markit iTraxx Crossover was 3.5bp tighter at 594bp, while the Markit iTraxx HiVol index was the best performer in percentage terms at 159.5bp, just over 3bp tighter than yesterday’s close.
After a lacklustre open, the markets responded positively to an unexpected announcement by the Bank of England. The central bank said it would increase the size of its quantitative easing programme to £175 billion from £125 billion. The decision came as a surprise to investors. There was always the possibility that the Bank would extend the programme but anything beyond £150 billion was considered highly unlikely. M4 money supply figures have been weak given the scale of the intervention, and this may have prompted the central bank to act. It also has been working on its quarterly inflation report, due next week, and today’s decision suggests it will show low levels of credit creation and significant spare capacity in the economy.
Spreads rallied after the announcement. However, gains were tempered by an insipid opening from the US stock market. Unemployment benefit figures were mixed, with investors concerned about the rising number of people continuing to claim benefits. The report was a precursor to tomorrow’s jobs report. A higher than expected figure has the potential to derail the current rally.
Among single names, European insurers stood firm following solid earnings reports. Zurich Financial tightened after it posted robust quarterly results. The Swiss company’s net profit of $892 million was 29% down from the same period last year thanks to lower investment gains and asset write downs. But the figures were still ahead of expectations as impairments were lower than feared. UK-based insurer Aviva also topped expectations. The company’s operating profit was up and credit investors were encouraged by the firm’s stronger capital position.
US credits were tighter, defying lower stock markets. The Markit CDX IG index was trading around 111bp, about 1bp tighter than yesterday’s close. Tightening credits easily outnumbered names that widened, with defensive sectors lagging the broader market. Retailers were among the best performers after same-store sales figures for July were released. The aggregate data showed a 5.1% drop over the month, roughly in line with expectations but the 11th consecutive month of declines. Department stores Nordstrom beat consensus estimates with its 6.9% fall. Peers JC Penney and Macy’s fell short of expectations but raised their earnings guidance for the year. Spreads in all three tightened significantly.
