European credit spreads rallied on Tuesday as strong US data eased market anxiety over the weakness of the economy a day ahead of an expected US Federal Reserve interest rate cut. "Confidence is building up on hopes that the Fed is going to ease again. We're starting to see some buyers of risk again. It's hopeful," a trader said.
By 1615 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 437 basis points, according to Markit data, 20 basis points tighter versus late on Monday.
The Crossover index pulled back from lows of around 433 basis points after traders cited talk of derivative losses at J.P. Morgan Chase & Co J.P. Morgan declined to comment. People familiar with the matter said the rumours were not true.
The investment-grade iTraxx Europe index was around 4.5 basis points tighter at 70 basis points. Despite the rally, nerves remained. "We're very unsure. The tone is definitely cautious." a second trader said. "The prevailing feeling is that you never know what's around the corner."
"Everybody's looking ahead for the next piece of bad news. Rest assured there's going to be something," he said. Strong US durable goods data offered a temporary respite to recent flagging market sentiment.
A report by the US Commerce Department showed that new orders for durable goods in December rose by a far greater-than-expected 5.2 percent, suggesting that the world's largest economy was healthier than many have believed.
Also, the Conference Boards showed US consumer confidence had fallen to 87.9 in January, down from last month's upwardly revised figure of 90.6. Nevertheless, the data was marginally better than economists had expected. But there were still many reasons to keep the champagne on ice.
US house prices in 10 major metropolitan areas fell by a record 8.4 percent in the year through November, far deeper than the 7.1 percent predicted by a Goldman Sachs consensus, according to the Standard & Poor's/Case Shiller Home Price Index. Elsewhere, a sinking housing market hit the earnings of California-based mortgage lender Countrywide Financial Corp, which posted a greater-than-expected net loss of $421.9 million.
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