Markit’s Gavan Nolan wrote this CDS report
After a promising start, European credit indices gave back early gains following disappointing earnings. This morning the Markit iTraxx Europe index broke though the 80bp barrier for the first time in nearly a month and the Markit iTraxx Crossover index tightened below 500bp for the first time since June 2008.
However, the optimistic mood was dented after Nokia posted a surprise third-quarter loss. The Finnish mobile phone maker posted a EUR559 million loss due to a EUR908 million writedown on a joint venture with Siemens. The performance at its core phone division was steady but its market share continued to fall, albeit at a slower rate. Nokia has suffered from the advent of the smartphone, a segment of the market where it lags Apple and Research in Motion.
Another set of “disappointing” earnings arrived from the US, placing further pressure on spreads. Goldman Sachs, that perennial over-achiever, posted net income of $5.25 a share, nearly four times that of last year and easily beating expectations of $4.24. But the firm could be said to be a victim of its own success, as rumours were circulating that the consensus forecast would be obliterated after JPMorgan’s strong numbers yesterday. Citigroup‘s better than expected results also failed to inspire investors.
The Markit iTraxx Europe and Crossover indices both lost ground and finished the day wider. Among single names there was a tightening bias, with insurers and resource credits leading the way. The latter sector was boosted by news that Xstrata had dropped its proposal to merge with Anglo American. The Swiss miner’s initial all-share approach was rejected by Anglo in June, and there was some concern among credit investors that an improved bid could lead to balance sheet deterioration.
Such concerns were apparent today in the UK supermarket sector. J Sainsbury‘s spreads widened sharply on rumours that the Qatari Investment Authority (QIA) is preparing a fresh bid for the retailer. The Qatari sovereign wealth fund failed in an attempt back in 2007 to secure control of Sainsbury, leaving it with a 26% stake. That episode caused the retailer’s spreads to widen sharply, reflecting the debt component of the bid. More volatility can be expected in the coming days until a clearer picture emerges.
In North America, Goldman and Citi’s optimism-quashing results weighed on spreads, with the Markit CDX IG index widening by 1bp to 97bp. Widening names easily outweighed tightening credits, with both cyclical and defensive sectors losing ground. Railroads, homebuilders and retailers, as well as financials, widened significantly. Earnings continued to overshadow economic data, this time in the form of inflation. Headline consumer prices rose by 0.2% in September, lower than the 0.4% expected, but core inflation was higher than forecast at 0.2%. Key earnings releases after the close include Google and IBM.