European credit spreads tightened sharply on Wednesday, lifted by rallying equities, hope that the worst of bank write-downs are over and strong US retail sales.
By 1623 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 360 basis points, according to Markit data, 13 basis points tighter versus late on Tuesday, having traded as low as 352 basis points.
"(The rally's) been basically driven by equities. The question therefore, is this rebound in equities going to be short-lived?" said BNP Paribas credit strategist Andrea Cicione.
The pan-European FTSEurofirst 300 index was up 0.42 percent to 1522.39. Financial names continued to steal the limelight, with Bear Stearns and HSBC revealing some worries concerning the extent of the subprime fallout.
Bear Stearns Cos Inc - which reported $1.2 billion in write-downs - said the worst of its mortgage write-downs were behind it and that its leveraged finance business was improving.
Five-year credit default swaps on Bear Stearns were at 48.5 basis points, a trader said. Elsewhere, HSBC Holdings Plc, Europe's biggest bank, reported that its third-quarter profits were ahead of last year's and revenue growth across the group offset a jump in its charge for bad debt in the US.
CDS on HSBC were roughly 4 basis points tighter at 48 basis points. "Bear Stearns has been pretty much priced in already and HSBC's numbers weren't great," a trader said. "I think today's moves are more to do with what happened overnight in the US but I'm not convinced it will keep tightening."
Analysts agreed. "We expect the situation in financials to get worse before it gets better. We're only starting to see signs of improvement. Banks are disclosing some of their problems, but I believe there is more to come," Cicione said. "We do expect the financial system to get worse before it gets better."
Sentiment was boosted by solid US retail sales figures, which rose by an expected 0.2 percent in October, Commerce Department data showed.
The iTraxx senior financials index was at 48.5 basis points by 1615 GMT, about 4 basis points tighter on the day. Meanwhile, the investment-grade iTraxx Europe index was at 49 basis points, 4 basis points tighter.
The cost of insuring debt of nuclear power firm British Energy against default rose after Standard & Poor's downgraded the company's long-term corporate rating to BB.
S&P's one notch downgrade moves British Energy more firmly into "junk" territory. Five-year credit default swaps on British Energy rose 10 basis points to 380 basis points, according to Deutsche Bank prices, after the news.
Ratings changes hit debt protection costs elsewhere. CDS on Swiss Chemicals Company Clariant widened 1 basis point to 82 basis points after Moody's Investors Service cut its outlook to negative.
In primary markets, Reseau Ferre de France (RFF), which owns and maintains France's national rail network, priced a 10-year 600 million euro bond at mid-swaps minus 6 basis points, in line with initial guidance.
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