Gavan Nolan of Markit wrote this CDS report
European credit indices tightened slightly today, a creditable performance given the volatility in equity markets. The Markit iTraxx Europe index was about 1bp tighter at 82bp, while the Markit iTraxx Crossover index closed at 512bp, around 7bp tighter than yesterday. The Markit iTraxx HiVol index was 1.5bp tighter at 135.5bp.
Sentiment took a knock from the latest US housing starts data. Figures for October showed the number of houses being built falling by 10.6%, a far cry from the modest increase expected by the street. The data, along with a flat NAHB confidence index, underlined just how weak the nascent housing recovery is. Building permits, which signal future construction, were also down, perhaps indicative of the uncertainty surrounding the expiration of the home-buyer tax credit. The credit has since been extended in to next year.
Higher than expected US consumer prices did little to lift the markets. The headline CPI rose by 0.3% in October, ahead of the 0.2% consensus estimate. This would normally put upward pressure on the dollar if investors expect the Fed to tighten monetary policy sooner than previously thought. But the markets appear convinced by the various Fed statements asserting that rates will stay low for an “extended period” and the dollar weakened.
With such a muddied picture it was unsurprising that single names were mixed. Resource-related credits continued to fare well given the persistent weakness in the dollar. PPR was another strong performer in the wake of its decision to IPO its African distribution unit CFAO. But banks were wider, and Irish banks in particular were again under pressure after AIB became the latest to raise its bad debt forecast. Irish Life & Permanent forecast higher-than-expected loan losses yesterday.
UK confectionery firm Cadbury was one of the worst performers amid more M&A activity. US firm Hershey and Italian company Ferrero have now declared their interest in acquiring the UK firm. Cadbury is already the subject of a hostile bid from Kraft, a development that has caused both firms’ spreads to widen sharply. It is unknown how Ferrero or Hershey would finance a bid, but the dramatic spread widening in the latter (Ferrero doesn’t trade in the CDS market) suggests that new debt is the most likely method.
In North America, the Markit CDX IG index held firm for most of the session despite declining stock markets. But it has started to widen slightly this afternoon as the housing data inspired negative sentiment.