Gavan Nolan of Markit wrote this CDS report
Tightening European credits were thin on the ground today as disturbing US economic data and disappointing earnings reports closer to home weighed on spreads. The Markit iTraxx Europe index was 2bp wider at 86bp, while the Markit iTraxx Crossover moved back above 500bp at 507bp. The Markit iTraxx HiVol performed relatively well compared to the other indices, widening by 1bp to 141bp.
The modest movements in the indices – by recent standards – masked significant widening in the underlying names. Tobacco credits were prominent after Swedish Match’s results proved a let down. The company’s third-quarter operating profit came in at SKr884 million, more or less in line with expectations. Higher margins for its core wet snuff product were encouraging. But the firm was cautious about its prospects in the fourth-quarter, warning that margins would slip and a weaker dollar – the US is one of its key markets – would hurt profits. Spreads widened in Swedish Match and other firms in the sector.
German pharmaceuticals and chemicals firm Bayer was another to disappoint. The company said third-quarter net profit was EUR249 million, down from last year and well below expectations of EUR307 million. Its crop-science division offset a solid performance from its healthcare business. However, the spread widening was tempered by EBITDA excluding special items coming in above consensus estimates. The firm also stuck to its full-year forecasts.
There was better news on earnings in North America. Auto parts supplier Johnson Controls was among the best performers after it beat expectations. The firm, one of the strongest in the sector, said earnings excluding one-off items were 52 cents a share, just beating expectations of 51 cents a share. Its quarterly revenues also came in above consensus estimates, continuing an encouraging trend seen this earnings season.
Textron Inc provided an additional boost after its results exceeded estimates. The aircraft maker said core earnings came in at 12 cents a share, well above consensus expectations of 4 cents a share. The company has struggled with a sharp decline in demand for its products, particularly its Cessna business jet. But it has managed to cut costs drastically, and is seeing some signs of stabilisation in its key businesses. It is also extricating itself from its finance division, where asset quality deterioration and funding problems caused its spreads to spiral above 1,500bp earlier this year.
However, as in Europe credit indices were wider, with the Markit CDX IG trading around 103.5bp, over 1bp wider than yesterday’s close. Economic data weighed on the market, outweighing positive earnings surprises. The Conference Board’s consumer confidence index for October came in at 47.7, the second consecutive fall and well below expectations. Relatively strong house price figures were overshadowed by the confidence report.