Markit’s Gavan Nolan wrote this CDS report
The sovereign CDS market was the driving force behind the credit market rally today, with a combination of technical and fundamental factors helping spreads to tighten. A wave of short covering, triggered by an increasingly hostile regulatory landscape, pushed sovereign spreads tighter and had a knock-on effect in the corporate market.
The Markit SovX Western Europe was 5bp tighter at 79bp, having earlier been as tight as 76bp. Bearing in mind that the index closed at 98bp last Thursday, this is a significant move. The Markit iTraxx Europe index also tightened but only by 2bp to 82bp, and the sovereign index is now trading tighter than its corporate cousin. Some would say that is the natural order of things, but the powerful effect of potential new regulations suggests that market participants are currently preoccupied with market structure rather than fundamentals.
Though fundamentals have taken a back seat, that’s not to say they aren’t relevant. Greece has tightened in recent days on the prospect of a German-led bailout, and its spreads continued to rally today. They hit 300bp for the first time since early January, though they settled back to 315bp later in the afternoon. Other peripherals rallied, as did the core eurozone countries Germany and France. Even the UK saw some gains, despite the sharp depreciation in sterling. The pound did recover some ground today but it is likely to remain sensitive to opinion polls, currently indicating a hung parliament.
Economic data continued to be supportive, with lower than expected eurozone inflation figures cementing expectations that rates will stay low in the medium-term. An index showing a sharp recovery in global trade was also welcome. The index from the Bureau for Economic Policy Analysis indicated that trade rose by 4.8% in December, the fastest increase in its 19-year history. Trade contracted sharply during the global recession and emerging markets, in particular, will be encouraged by the recovery.
In the single name market there was a tightening trend, with names exposed to the peripheral eurozone countries outperforming. Banks and telecoms led the way, with UK retailers and defensive sectors lagging behind.
The picture was much the same in the US. The Markit CDX IG index opened about 1bp tighter at 87.5bp, and the vast majority of its constituents also tightened. AIG continued to rally after it announced the sale of its Asian business to Prudential for $35 billion.