Rally gathers momentum
The positive momentum in credit following Friday's strong US jobs report continued this week as investors took an optimistic view of the market's prospects going into year-end.
The better than expected non-farm payrolls numbers have not derailed the rally. On the contrary, they have caused spreads to tighten further. The markets appear more comfortable with a potential December QE taper, though that is far from a done deal.
US monetary policy is probably the main determinant of global spread direction, but the performance of the Chinese economy is also important. Figures released today showed that exports rose 12.7% from a year earlier, significantly higher than the 7% consensus estimate. This indicates that the world's second-biggest economy will grow at a brisk pace in the final quarter of the year, and the news aided today's market rally.
The Markit iTraxx Europe was almost 3bps tighter at 77.75bps, while the Markit CDX.NA.IG tightened 2bps to 67.5bps.
German tyre company Continental AG was one of the many single names to rally. The firm was upgraded two notches to BBB by S&P, meaning that all three major rating agencies classify this credit as investment grade. The upgrade was based on S&P's reassessment of the link between Continental and Schaeffler, its majority shareholder. As there are no cross default clauses on financial indebtedness and Continental's minority shareholders are actively involved in running the company, S&P decided to de-link the ratings of Continental and Schaeffler.
The credit market reaction was muted. Continental's CDS spreads tightened 5bps to 88bps. The firm was already trading with an implied rating of BBB, according to Markit data. So the upgrade was largely priced in.