European credit markets tighten

European credit spreads tightened on Monday, lifted by rising stocks and upbeat market sentiment ahead of an anticipated US interest rate cut. By 1614 GMT, the iTraxx Crossover index, made up of 50 mostly speculative-grade credits, was at 320 basis points, according to data from Markit, nine basis points tighter versus Friday.
The Crossover index had traded roughly within a five basis point range, bouncing between 320 and 325 basis points. "The markets are concentrating on what the Fed is going to be doing on Wednesday," said Rajeev Shah, a credit strategist at BNP Paribas, adding Friday's release of US non-farm payroll data will also be in focus.
The US Federal Reserve is expected to cut US interest rates by 25 basis points on fears of a global economic slowdown, with many questioning whether the cut will equal September's surprise 50 basis points reduction. "The cost of doing nothing in terms of economic growth may be high. Our economists are expecting a string of 25 basis points (including this week), with deeper cuts a clear risk," said Shah.
The Dow Jones industrial average index rose 54.89 points to 13,858.83 by 1628 GMT.
The investment-grade iTraxx Europe index was one basis point tighter at 37 basis points. This week sees another flood of third-quarter earnings results. Nevertheless, both strategists and traders were quick to downplay their significance in driving current market sentiment. "These numbers, they need to be horrific for the market to be that bothered," a trader said. "The market has been primed for bad numbers for such a long time that really it's the case that they need to be double as bad as expected to really cause a major problem."
Swiss bank UBS AG warned it may face more writedowns on its fixed-income portfolio but said, just a day before releasing earnings results, its third-quarter pretax loss would be no worse than already predicted.
Five-year credit default swaps on UBS rose two basis points to 40.5 basis points. In other single names, the cost of insuring debt of Norske Skog against default fell after a business paper reported the Norwegian papermaker was in talks on a structural deal with Finland's Stora Enso.
Five-year CDS on Norske Skog narrowed 20 basis points to 305 basis points by 1522 GMT, according to Deutsche Bank prices. Meanwhile, CDS on Stora Enso tightened three basis points to 112.5 basis points.
Elsewhere, CDS on Britain's J Sainsbury extended Friday's rally to tighten 30 basis points to 240 basis points after it emerged take-over hopeful Qatar's Delta Two was seeking extra financing for its bid for the UK supermarket chain.
Conversely, CDS on SAS AB widened 12 basis points to 260 basis points following a decision to stop using its fleet of Dash 8 Q400 planes after a series of accidents, stoking concerns about earnings.