European credit indices rallied today as the economic climate remained supportive of risk assets. The Markit iTraxx Europe index closed at 84bp, 1.5bp tighter than yesterday’s level. Both the Markit iTraxx HiVol and Crossover indices outperformed relative to the main and equities, tightening to 132.5bp (4bp, 3%) and 512bp (14bp, 2.7%) respectively.
The US dollar broke though the key $1.50 against the euro, and is now at its weakest level since August 2008. The depreciation of the currency appears to be fuelling investment flows in to risky assets throughout the world, though the benefits to a eurozone looking to export its way out of trouble are questionable. A slew of economic data in the US supported the rally. Personal consumption expenditures, a closely watched indicator at the Fed, rose by 0.7%, better than expected and reversing a drop in the previous month. The number of initial jobless claims fell by 35,000 to 466,000, again beating expectations. Further good news came in the form of 6.2% rise in new home sales, bringing it to its highest level in more than years. The triumvirate of positive data helped offset weak consumer sentiment and durable goods figures.
Greece has been the focus of attention in the sovereign CDS market in recent weeks, and it widened again today to reach a new record wide level. But the real story today came from the Middle East. The Dubai Government announced that it is restructuring Dubai World, an investment company owned by the government, with immediate effect. It has asked creditors for a six-month standstill on its obligations until at least 30 May 2010. Nakheel, a real estate subsidiary of Dubai World, has a convertible bond due next month. The picture is muddied, but it is puzzling that Dubai received $5 billion in bond proceeds from two Abu Dhabi banks but made clear that this is separate from the Dubai World restructuring. From a CDS perspective, much will depend on whether the standstill is voluntary or mandatory. If it is the latter then a credit event is a possibility. Spreads throughout the region widened on the shock news. More volatility can be expected as investors await details of the restructuring.
In Europe the single name market was mixed. Banks were tighter, as were autos and other cyclical sectors. Compass Group widened despite posting annual profits at the top-end of forecasts. Credit investors were concerned by the UK catering firm stating that it is interested in making “infill” acquisitions. Compass is an established defensive name and has performed relatively well during the recession.
In North America, the Markit CDX IG index was flat at 102.5bp, giving back earlier, modest gains. As in Europe the single name picture was mixed with energy and insurance sectors outperforming, while technology, media and telecoms all widened.
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