European credit spreads steady

European credit spreads held steady on Friday even as Countrywide Financial Corp reported a bigger-than-expected loss and US consumer sentiment fell to a 17-month low. By 1510 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was steady at 326 basis points, according to data from Markit.
"The market wants to stay positive, it's taken the Countrywide results in its stride even though it is a much bigger loss than first thought," said Neil Murray, head of credit at Scottish Widows.
Countrywide, the largest US mortgage lender, said the housing slump led to a $1.2 billion third-quarter loss, but investors took as positive its forecast to return to profit this quarter.
Countrywide shares soared more than 10 percent. But credit agency Standard & Poor's cut its debt rating one notch to BBB+ - the third lowest investment grade rating - and said it may cut again, citing the "sizeable" third-quarter loss.
Neither did a steeper-than-expected drop in US consumer sentiment - seen as a proxy for future spending - shake confidence. The Reuters/University of Michigan Surveys of Consumers' final October consumer sentiment index fell to 80.9 below a consensus forecast of a drop to 82.0.
The investment-grade iTraxx Europe index was at 37.75 basis points, 0.5 basis points wider. "Ultimately markets are still in a phase where they think the Fed can save the day and that it can continue to cut rates to save risky markets. That's why we're still trading at relatively tight levels," he added.
Credit derivative indexes are likely to stay range-bound over the next few days ahead of the US Federal Reserve's rate decision on Wednesday. Markets are expecting the Fed to cut rates by 25 basis points to 4.5 percent after economic data has been predominantly weaker.
Meanwhile the focus will remain on data and earnings with the financial sector in the spotlight ahead of numbers from UBS, Deutsche Bank - which have already warned on profits - and Credit Suisse next week.
Investors are particularly nervous that other banks will announce bigger losses after a mammoth $7.9 billion write-down by Merrill Lynch this week for collateralised debt obligations linked to subprime assets - over $2 billion more than it initially estimated.
"None of the European names are as exposed. Merrill Lynch was the father of the CDO, which is why it has been hit so hard. I don't expect any disasters to that degree but it is a worrying situation," said Jeroen van den Broek, ING credit strategist.