Markit’s Gavan Nolan wrote this CDS report
European credit markets rallied today, supported by growing optimism about the Greek situation and robust economic data . After a slow start the Markit iTraxx Europe index gained ground in the afternoon, tightening by nearly 2bp to dip under 80bp for the first time since February 4. The Markit iTraxx HiVol and Markit iTraxx Crossover indices followed rallying stock markets, tightening to 120.5bp and 436bp respectively.
chart by Markit
Greece announced its heavily trailed austerity package, including public sector wage cuts, pension freezes and increases in VAT and excise taxes. The measures were welcomed by the markets but expected, and had little impact on spreads after they were announced. But the overall tone was positive, and became more so following supportive comments from Jose Barroso, President of the EU Commission. Barroso said “Greece’s ambitious program to correct its fiscal imbalances is now on track”.
The key issue has always been whether Greece has the political will to implement fiscal tightening. Its history raises serious doubts, and the markets will still look for EU members to stand behind its errant member. Investors weren’t satisfied with an implicit guarantee before. Greece tightened to 300bp in the afternoon. Other peripherals also tightened, though the technical rally of the last few days was not evident. The Markit iTraxx SovX WE was around 78bp, more or less the same as yesterday.
Leading indicators from the macroeconomy also drove spreads tighter. The CIPS/Markit UK Services PMI for February was 58.4, up from 54.5 last month and the highest level since January 2007. The data suggests that the UK economy will continue to grow in the current quarter. The equivalent index for the eurozone was not as strong, with the index falling from last month, though it still indicated expansion.
There was a strong tightening bias in single names, with credits exposed to the peripheral eurozone countries among the best performers. Hellenic Telecom and Portugal Telecom both tightened significantly. The UK banking sector also tightened, helped by solid results from Standard Chartered.
The US credit markets put in a strong performance, with the Markit CDX IG tightening by over 2bp to trade around 87.5bp. The single name market was mixed, with a fairly even balance of tightening and widening credits. A better than expected ADP employment survey for February helped support the rally.