No News Is Good News

The credit markets opened the week on a high note, as the all-important date of November 3 draws closer. The Federal Reserve‘s FOMC committee is scheduled to announce its decision on monetary policy, and expected to confirm the markets current assumption of further QE. Risk appetite has risen in recent weeks in anticipation of more liquidity entering the system.

“Next week we should receive confirmation, though it obviously isn’t certain.”

Gavan Nolan


“One of the main issues that has the potential to depress growth – competitive devaluations – was in the news over the weekend. Leaders from the G20 agreed a framework that will address global imbalances, though it fell short of any specific proposals. The absence of any damaging rhetoric was welcomed by investors and helped spreads tighten today,” vice president at Markit Credit Research writes in his Daily Alert.

The rally was more apparent in credit than equity, the latter market putting in a lacklustre showing.

Short covering, as well as the reasons outlined above, contributed to the outperformance.

Better than expected US existing homes sales were also a factor. Sales rose by 10% in September, the second increase in a row and significantly better than the 5.3% consensus estimate.

“However, it should be borne in mind that sales are down 19% from the same period a year ago, highlighting the uphill struggle that the US housing market is facing,” Gavan Nolan points out.

Toll Brothers closed on a $885 million loan to finance the buying of land and building of new homes, a potentially positive sign of recovery in the sector.

“However, a significant supply overhang continues to exist and prices remain depressed in many areas of the country,” vice president Otis Casey at Markit says in a comment.

Sovereigns were tighter today but lagged the broader market, with the peripherals making modest gains amid relatively light flows.

Belgium, a sovereign that trades somewhere between the peripheral and core euro zone countries, was among the day’s strongest performers following a solid government bond auction.

The EUR2.727 billion sold was near the top of the EUR1.8 to EUR2.8 billion range. The bid-to-cover ratios were close to the previous auctions in August and September, though the yields were slightly higher, according to Markit Financial Information.

Like the Markit iTraxx Europe and Markit iTraxx Crossover indices, the Markit CDX IG tightened to a level not seen since the beginning of May.

The positive start to earnings season continued, with Office Depot and RadioShack the latest firms to beat expectations.

Even a shareholder-friendly action from Lockheed Martin didn’t lead to spread widening; the defence company said its board had approved a $3 billion share buyback.

“Investors interpreted this as a sign of confidence, with Lockheed‘s status as one of the strongest US credits no doubt helping its cause,” Nolan notes.

Here’s some of Monday’s key credit numbers:

  • Markit iTraxx Europe 96bp (-3.5), Markit iTraxx Crossover 448bp (-11)
  • Markit iTraxx SovX Western Europe 140bp (-2.5)
  • Markit iTraxx Senior Financials 120bp (-4.5)
  • Markit CDX IG 93bp (-3)
  • Sovereigns – Greece 665bp (-10), Spain 200bp (-3), Portugal 340bp (-8), Italy 170bp (-2), Ireland 425bp (-7), Belgium 112bp (-8)
  • Office Depot 475bp (-25), Radioshack 195bp (-4)

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