UPDATE: Corporate Credit Indexes Tighten As Earnings Support

2nd Aug 2010 10:43

By Art Patnaude Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Spreads on European corporate credit default swap indexes were tighter Monday as economic data and second-quarter earnings reports from banks continued to support the positive momentum built last week. At around 0930 GMT, 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 14 basis points tighter at 463/467 basis points, from 479 basis points at close Friday, according to Markit. The Europe index of 125 high-grade borrowers was 3.1 basis points tighter at 101.4/102.4 basis points. Second-quarter earnings have stayed in focus this week, with the banking sector having a particularly full schedule. Getting it off to a good start Monday was BNP Paribas SA (BNP.FR), France's largest lender by market capitalization, which reported far better-than-expected net profit figures. "The 2Q10 results give detailed evidence of what the E.U. stress test has implied: BNP's high risk-absorbing capacity of both the profit and loss and the balance sheet. Hence, we expect spreads to continue to tighten, particularly of hybrid bonds (here outperforming Societe Generale (GLE.FR))," said UniCredit SpA analysts in a note. HSBC (HBC) also released market-pleasing numbers, with net profit for the first half of the year doubling on lower impairment charges and a gain on the value its own debt. Other than earnings, economic data should be closely watched throughout the week for hints at the pace of recovery, with all eyes centered on U.S. non-farm payroll figures Friday. "Overall a big week and by the end of Friday we'll know much more about the shape of the global recovery and how risk assets will likely respond to it," said Deutsche Bank strategist Jim Reid. The cost of insuring European sovereign debt also was also mostly lower Monday, with the five-year credit default swap on Spain and Italy one basis point tighter at 184 basis points and 136 basis points, respectively, while Portugal was five basis points tighter at 225 basis points, according to Markit. CDS are derivatives that function like a default insurance contract for corporate debt. If a borrower defaults, swap sellers compensate swap buyers. Buyers may be protecting investments they own or simply making bearish bets against companies or countries. -By Art Patnaude, Dow Jones Newswires; +44 (0) 207 842 9259; [email protected] (END) Dow Jones Newswires August 02, 2010 05:43 ET (09:43 GMT)