Gavan Nolan of Markit wrote this CDS report
European credit indices widened for the sixth consecutive session today following another sharp drop in Chinese equities. The Markit iTraxx Europe was at 102.75bp, an improvement from earlier in the day but still over 2bp (2.2%) wider than yesterday’s close. The Markit iTraxx HiVol was again lagging behind at 195bp (+9.5bp, 5%), while the Markit iTraxx Crossover was at 646.5bp (11bp, 1.8%).
All three indices underperformed equities, which recovered after a sluggish start. Chinese stocks suffered another sharp sell-off amid talk that the government is preparing to tighten monetary policy. Lending through state-owned institutions exploded in the first-half of the year, helping to underpin growth. However, there are serious concerns about the allocation of funds, with the property and stock markets appearing to gain disproportionately. The government shares these concerns, and new lending dropped significantly in July due to pressure from official sources. Rumours that further measures restricting credit are in the pipeline have spooked investors.
Mining credits based in Europe, such as potential merger partners Xstrata and Anglo American, were the beneficiaries of China’s insatiable demand for natural resources during the boom years. Commodity prices have since fallen sharply from their peak, though they have recovered somewhat this year in tandem with “green shoots” sprouting in the global economy. So it was no surprise to see mining names widen today after the sell-off in China.
They weren’t the only ones. The vast majority of European credits widened today, with tightening names scarce on the ground. Cyclical and defensive sectors alike lost ground. As well as the China correction, news that the Bank of England was split on its recent quantitative easing decision was in focus. A split at the MPC wouldn’t have been a surprise – the £50 billion increase in bond purchases was unexpected. But the news that Mervyn King and two other MPC members had voted for a £75 billion increase was a surprise and raised concerns that the UK economy might be in worse shape than most supposed. The impact of the news was felt mainly in the currency markets, with spreads and stocks little moved after the announcement.
The European pattern was replicated in the US. Stocks opened down but recovered quickly and are now trading in positive territory. The Markit CDX IG is trading at 121.5bp, 1.5bp (1.3%) wider than yesterday’s close but an improvement from earlier in the session. Widening credits outnumbered tightening names, with media and technology among the worst performing sectors. Hewlett Packard‘s spreads were solid after it posted second-quarter results that beat expectations and affirmed its full-year forecast.