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Traccr Newsletter

 

Issue 4 - August 2010

 

LONDON (Dow Jones)— Spreads on European corporate credit default swap indexes were tighter early Tuesday as the global rally continued to find support in second quarter earnings reports and positive economic data.  The Europe index of 125 high-grade borrowers was 1.4 basis points tighter at 97.9/98.9 basis points, under 100 basis points for the first time since the middle of May, when the massive European bailout package sparked a brief bout of investor confidence. The index closed at 97.3 basis points May 14 before rising to over 140 basis points by early June, according to Markit. The Markit iTraxx Crossover index, which lets investors buy or sell protection on the debt of a basket of 50 mostly sub-investment grade European corporate borrowers, was also tighter by seven basis points at 449/453 basis points, from a closing level Monday of 459 basis points.

 

Earnings figures have been one of the major drivers behind the returning positive sentiment in credit markets, with the worries over the banking sector seemingly forgotten, as profit figures impress. Economic data have been the other boon, with the U.S. ISM manufacturing data Monday declining less than expected.

 


Vehicle Sales Could Offer Housing Clues

Financial Credits Set To Grind Tighter in August

 

London (Dow Jones) - Tuesday brought U.S. vehicle sales data for July, a series which may provide directional clues for the more important housing market, according to Rabobank. Both markets suffered heavily through the financial crisis and both received federal government support. However, the Dutch bank reminds us, aid focused on the auto sector expired many months ago while housing has only recently lost its fiscal lifeline. It is now experiencing a renewed downturn that has raised concerns over a double-dip recession. A small increase in car sales, to 11.6 million, is expected for July, a rise of 4.7% from June's 11.08 million. The expected level of sales for July would be 27.3% above the February 2009 low point. However, the level remains low by historical standards; sales averaged 16.2 million each month through 2007. Thus there could be a reminder in these numbers that demand remains weak despite a modest recent improvement.

 

Financial credit spreads set to grind tighter during August after the recent leg tighter, amid positive stress test results, say Diawa Capital Markets. "The 2Q results we have had so far suggest that most banks will outperform market expectations despite the difficult trading conditions during the quarter...Until the expected spate of issuance hits the market in September, we cannot see a catalyst for spreads to change direction during one of the quietest months of the year." Daiwa sees non-financial credits set to remain rangebound-to-a-touch-tighter in the summer. Markit iTraxx Senior financials are 1 bp tighter at 108.5/109.5 bps.                                                                                                                                  

 

 

Credit Highlights

Japan's benchmark index for credit default swaps edged low, as last week's European stress test results didn't provide any big surprises, stifling demand for protection against default risks. Investors were of the view that the outcome from stress tests on European banks increased transparency in the financial sector somewhat, providing "a sense of security" in the CDS market, said Yasuhiro Matsumoto, a senior analyst at Shinsei Securities. Still, "it would be too optimistic to say concerns over Europe's sovereign debt and financial sector are dispelled," a Japanese brokerage trader said.