Markit’s Gavan Nolan wrote this CDS report
European credit indices recovered losses from yesterday’s correction amid signs that the major economies are continuing to improve. The Markit iTraxx Europe index was trading around 87bp, about 3.5bp tighter than yesterday’s close. The Markit iTraxx Crossover index was 17bp tighter at 524bp, while the Markit iTraxx HiVol index was trading around 142bp, 7bp tighter on the day.
Positive economic news helped alleviate nerves ahead of the Fed’s policy announcement later today. The Markit PMI indices, key leading indicators followed by central banks, showed that the service sectors in the UK and eurozone picked up during October. The CIPS/Markit UK Services PMI came in at 56.9, well above expectations and signalling the strongest growth in over two years. The Markit Eurozone Services PMI rose to 52.3, the second consecutive month of expansion. France was the best performer, with the bubble economies of Spain and Ireland continuing to lag behind. Coming on the back of better than expected manufacturing data earlier this week, the PMI’s indicate GDP growth in the UK and eurozone in the fourth-quarter.
Earnings also provided support to the rally. UK retailers tightened after Marks & Spencer and Next both posted results that beat consensus estimates. Marks said its first-half operating profit was £298 million, above expectations of £285 million. The firm was cautious about the Christmas period and next year, as was its competitor Next. But the latter company saw its spreads outperform after it upgraded its profit forecast for the year.
Autos also rallied in a session where tightening credits easily outnumbered widening names. News that GM has decided not to sell its European business was greeted as a vote of confidence in the sector, though the German government is less enamoured with the change in strategy. Strong results from Nissan, part-owned by Renault, also helped push spreads tighter.
Societe Generale tightened after it posted third-quarter profits more than double that of the same period last year. The bank, like many others in the sector, said that a strong performance from its investment banking division helped offset weakness elsewhere. Most of the other European banks followed SocGen tighter, with a couple of notable exceptions. RBS and Lloyds lost ground in the wake of their EU-enforced restructurings yesterday.
In North America a growing feeling that the Fed will refrain from changing the language in its statement today helped spreads recover. Financial markets have been volatile in recent days amid concerns that the Fed will signal a withdrawal of monetary stimulus sooner than anticipated. The announcement is due later today, and shifted attention away from important economic releases. The ISM services index fell to 50.6 in October, quashing expectations of a rise to 51.5. Bullish investors took comfort from the fact that the index was above the neutral 50 level for the second consecutive month.
A Panglossian view could also be taken on today’s ADP employment report. The 203,000 jobs lost in October was above the 190,000 consensus estimate but still a significant improvement from previous months.
Among single names there was a significant tightening bias, with the cable/media sector the strongest performer. Both Time Warner and Comcast beat expectations for third-quarter earnings, with the latter impressing by increasing free cash flow by 20%. But there are concerns among credit investors that Comcast will use the cash to buy a stake in GE’s NBC Universal, which would have a detrimental effect on spreads.
