Markit’s Gavan Nolan wrote this CDS report
European credit spreads continued to widen as the market reacted negatively to yet more disappointing economic data. The Markit iTraxx Europe index closed at 92.26, nearly 5bp (5.5%)wider than yesterday and the first time it has closed above 90bp since early September. The Markit iTraxx HiVol (160bp, +6bp, 4.1%) and the Markit iTraxx Crossover (591bp, +20bp, 3.5%) were both wider, and underperformed weakening equity markets.
We caught a glimpse yesterday of how leading indicators can affect market sentiment. The Chicago ISM manufacturing survey came in well below expectations and caused a significant sell-off. Today the national surveys had an even bigger impact. The Markit UK Manufacturing PMI posted a reading below the neutral 50 mark for the second month running. The 49.5 level for September was slightly below the 49.7 August mark, disappointing investors hoping to see signs that the manufacturing sector was leading the economy out of recession. The Eurozone PMI came in above the flash estimate but the 49.3 level showed the sector was still contracting.
The mood wasn’t much better in the US. The ISM Manufacturing survey also posted a small decline, dropping to 52.6 from 52.9 in August. While still showing expansion, investors were expecting a figure of around 54, and the negative surprise added to nerves in the market. A rise in the number of Americans claiming unemployment benefit had already created negative sentiment.
Tightening credits were scarce on both sides of the Atlantic. In Europe, BAE Systems widened significantly after the UK’s Serious Fraud Office (SFO) said it would seek to press criminal charges against the company. The defence contractor is accused of paying bribes to win business in several countries, including the Czech Republic and Tanzania. If found guilty BAE will face a heavy fine. But more damaging could be a potential ban on doing business in the EU and US, where it is also under investigation. A lengthy trial could also have an effect on its ability to win new orders in the interim.
Few credits were spared in today’s correction. Supermarkets were particularly active, though no fresh news was apparent. Sovereigns also some action, with the Markit SovX WE S2 widening by over 2bp to 48.75bp. Ireland was among the worst performers amid nerves over the Lisbon Treaty referendum. In Eastern Europe, Romania widened after its coalition government collapsed
The widening pattern in Europe was replicated in the US. The Markit CDX IG was nearly 5bp (4.8%) wider at 107bp, with nearly all of its constituents widening. The negative economic news meant that no sector escaped, with robust cyclical names such as the railed roads taking the brunt. Consumer goods also endured a tough session, with Kraft widening on reports that is has secured funding for its Cadbury takeover bid.