European credit spreads held steady on Wednesday with markets relatively unstirred by US data on the performance of the services sector or a reassuring third quarter earnings outlook from Deutsche Bank.
By 1505 GMT, the widely watched iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was slightly tighter by 1 basis points at 314 basis points, a trader said, but had stuck in a tight range for most of the day.
"It seems pretty quiet out there. People may be waiting for the payrolls data," said Ben Bennett, a credit strategist at Lehman Brothers. US non-farm payroll numbers, due on Friday, are particularly significant this month after a shock contraction in August spooked markets and undoubtedly helped sway the US Federal Reserve to cut interest rates by 50 basis points.
On Wednesday data showed growth in the US service sector eased only slightly more than expected, offering a reassuring tone that the broader US economy, although soft, is weathering the fallout from the weak housing market. News from heavyweight financials also continued to dominate headlines.
UK mortgage lender Northern Rock's advisers are in talks with US buyout firm JC Flowers over a potential bid, sources familiar with the deal said. A successful bid would be more positive for holders of the banks subordinated debt than a break up of the group.
Five-year credit default swaps were firm on Wednesday but will probably stay volatile with a deal far from certain yet. Elsewhere, Deutsche Bank said it was sticking to its 2008 targets but said it was taking big hits from the global credit problems. The news was largely interpreted as positive since many investors expected a gloomier outlook for profits.
And Credit Suisse said it would remain profitable in the third quarter despite a warning earlier this week that it would also take a hit from the credit crisis. Credit spreads have been remarkably calm this week even as several banks have disclosed losses or write-downs related to the problems in the subprime sector.
Some analysts have attributed the reaction as relief that there is at least some transparency on subprime losses emerging to restore confidence. Others predict, however, that the strong likelihood of other profit warnings will eventually start to weigh on sentiment.
"Deutsche Bank was a relief. When UBS came out it was a bit of an awakening about the risks of possible bad results. But that got priced in. The market moved a little bit wider earlier in the week and now we have had a bit of a relief rally as Deutsche Bank wasn't that bad," said Bennett.
"In this market, there is something everyday that could come out and scare people. The question is how much more scared can people get?" The primary market was less active than it has been in the previous two weeks although some strategists said banks have been sounding out investors about potential lower tier 2 issues that could hit markets in the next few weeks.
There was also a nervous tone ahead of the European Central Bank and Bank of England rate announcements due on Thursday. Though economists polled by Reuters expect rates to remain on hold at 4.0 and 5.75 percent respectively, there has been speculation of a possible UK rate cut. That could pose scope for disappointment if it does not materialise, a trader said.
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