Gavan Nolan of Markit wrote this CDS report
The European credit markets took a turn for the worse this afternoon following another session of mixed US economic data. The Markit iTraxx Europe was trading around 88bp (3.5bp, 4% wider), while the Markit iTraxx HiVol and Crossover indices also were wider, though the movements were not as severe as the main. The Markit iTraxx SovX Western Europe was a touch wider at 47bp, ending the two day rally after the roll.
Events across the Atlantic were the catalyst for bearish sentiment, repeating yesterday’s pattern. An upward revision to US second-quarter GDP figures – the economy contracted by 0.6% instead of the initial estimate of 1% – was overshadowed by disappointing survey data. The ISM-Chicago business activity index fell to 46.1 in September from 50 in August, quashing expectations of a rise. Investors were shaken by the data release, which bodes ill for the main event tomorrow. The ISM index for the whole of the US manufacturing sector is published tomorrow, as are the Markit PMIs for the eurozone and the UK. A weak ADP employment report created further verves ahead of Friday’s non–farm payrolls report.
In the single-name market there was a bias towards widening, with bid speculation prevalent. Solvay saw its spreads widen amid rumours that it is considering a takeover of Swiss specialty chemicals maker Clariant. M&A speculation was inevitable after the Belgian firm agreed to sell its pharmaceuticals unit to Abbott on Monday for EUR4.5 billion. The deal is expected to close Q1 2010, and Solvay has said that it will not spend the proceeds until the deal is finalised. Nonetheless, this has not prevented the rumour mill spitting out possible targets, and Clariant’s spreads tightened on the speculation. The Swiss firm is a BB credit, while Solvay is a solid single-A. More volatility can be expected until the Belgian company makes its intentions clear.
Danone, the subject of M&A rumours late yesterday, bounced back today after the firm rubbished the reports. However, at 58bp its CDS spreads remain some way off the 46bp level pre-rumour, suggesting the markets have not discounted Danone entering the fray, whether for Mead Johnson or another firm.
Italian bank UniCredit was one of the strongest performers today after it announced that it would refrain from asking for state aid and instead go to the equity markets for funds. The bank said it would ask investors for EUR4 billion and use the proceeds to boost its capital ratios, among the lowest in Europe.
In the US the Markit CDX IG moved above 100bp before settling just below as markets recovered later in the session. Widening credits overwhelmingly outnumbered tightening names, with no sector being spared. Troubled lender CIT Group was volatile today amid reports that is is planning a debt-for equity swap. It is unclear whether this will succeed, with bankruptcy still a realistic possibility. The firm’s CDS are trading around 35 points upfront.