Gavan Nolan of Markit wrote this CDS report
European credit indices rallied today, matching a strong performance in the equity markets and recovering some ground from last week. The Markit iTraxx Europe index closed at 84bp, 1.75bp tighter than Friday’s level. The Markit iTraxx Crossover was 11bp tighter at 520.5bp, while the Markit iTraxx HiVol index closed at 135.5bp, about 3.5bp tighter than Friday’s close.
The dollar continued to weaken and is close to its recent lows. The depreciation is supporting the rally in risky assets, and a break through the $1.50 level against the euro could act as a cue for further bullish activity. Economic releases on both sides of the Atlantic also helped to push spreads tighter. The Markit Flash Eurozone PMI rose to 53.7 in November, its fourth consecutive monthly rise and its highest level for two years. The data pointed towards another period of growth in Q4, though a fall in new orders suggests that the recovery is fragile.
US housing data, an area of concern in recent weeks, gave spreads a boost. Existing home sales for October were up 10.1%, easily beating expectations of a 2.3% rise. It is likely the increase was fuelled by an expectation that the first-time buyer tax credit would expire at the end of this month as scheduled. The US government has since announced an extension of the measure to April 2010.
Among single names tightening credits comfortable outnumbered widening names, with some resistance in the consumer goods sector. UK confectionery firm Cadbury, already the subject of a hostile bid from Kraft Foods, looks set to be at the centre of a bidding war. Italian company Ferrero and US firm Hershey have indicated they are considering a bid, possibly in conjunction with each other. Hershey has seen its spreads widen dramatically in recent days on expectation that the bid will be largely debt-financed and will result in balance sheet deterioration. There are also rumours that Swiss giant Nestle could enter the fray.
The Markit CDX IG index tightened on the positive housing data and weaker dollar, though it lost some of the gains later in the session. At the time of writing its was trading at 101.5bp, just over 1bp tighter than Friday’s close.