Markit’s Gavan Nolan wrote this CDS report
The Markit iTraxx Europe widened for the third consecutive day, proving immune to rising stock markets. The index closed at 71bp, about 0.5bp wider than yesterday’s close. The Markit iTraxx HiVol index was also slightly wider, closing at 99bp. But the Markit iTraxx Crossover index was more in tune with equities and rallied to close around 402bp.
The direction of the single-name market was clear: all of the 125 constituents of the Markit iTraxx Europe widened. The skew on the index was about 3bp yesterday – nothing out of the ordinary – and this will have narrowed today. Disappointing economic data from the US and volatility in the sovereign CDS market didn’t help, but the widening trend was clear from the off.
On the macro front the key release of the week – US retail sales – came in below expectations. Excluding cars sales fell 0.2% in December, coming in well below the 0.3% increase expected by the street. Initial claims for jobless benefits rose unexpectedly, compounding the negative news. But the stock market has been taking negative news as a signal that the Fed will keep monetary policy accommodative, thereby maintaining the appetite for risky assets.
Greece suffered another torrid day in the credit markets, an experience it must be getting used to. Its spreads were as wide as 345bp, a record level as attempts by the government to reassure the markets fell on deaf ears. A plan to reduce the country’s fiscal deficit from 12.7% of GDP to 2.8% by 2012 was met with skepticism. Greece suffers from a credibility problem; markets simply don’t believe that there is the political will to push through the necessary public spending cuts. Negative comments from Angela Merkel didn’t help matters. The Markit iTraxx SovX WE index widened to 77bp, the widest level since it began trading last September. Most of this was driven by the peripheral sovereigns widening – Portugal hit its widest level since March 2009.