Credit rallies on tremendous progress
Markets seem convinced that the "tremendous progress" made in the debt ceiling talks will translate into a deal and avert a US technical default.
An agreement in the Senate hasn't been reached yet, but the noises from Washington suggest it won't be long. Senate majority leader Harry Reid was bullish yesterday in his prognosis, and went on to say that "perhaps tomorrow will be a bright day".
Spreads rallied as a result, and the Markit iTraxx Europe dipped below 90bps for the first time since the index roll in September.
However, it is no certainty that a deal will be struck today, and the latest reports indicate that the Republican controlled House has beaten the Senate to it and issued its own proposal. This could slow down the approval process, though the reports hint that the House deal has only superficial differences with the probable Senate agreement.
Even if the October 17 deadline isn't met, the Treasury should have cash on hand to avert a technical default for a couple of weeks. US 5-year sovereign CDS tightened 4bps to 33bps today, a level that is consistent with a very low probability of default.
Politics aside, US earnings season gathered momentum with several blue-chip names reporting. Citigroup's results - which were released prematurely by a news wire - disappointed, with both earnings and revenues missing estimates.
Fixed income revenues are under pressure across the industry, and Citi was no different. However, the bank missed expectations by a relatively small amount, and the positive sentiment from Washington meant that banks' spreads tightened across the board.
In the corporate world, Johnson & Johnson beat estimates and Coca-Cola was in line. Both names tad at very tight levels and saw little movement today.