Markit iTraxx index recovers

European credit spreads recovered late on Friday as Citigroup's better-than-expected results helped soothe fears about the extent of losses in the banking sector. Citigroup, the largest US bank, posted a smaller-than-expected quarterly loss, despite $11.7 billion of writedowns and credit losses tied to deteriorating capital markets and an economic slowdown.
By 1348 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was steady at 530 basis points, according to data from Markit, erasing earlier losses. The investment-grade Markit iTraxx Europe index was at 98.25 basis points, 0.25 basis points wider.
"The Merrill news has done the market out of a few basis points and stocks are off a bit, which is also not helping," a London-based trader said. J.P. Morgan's smaller-than-expected decline in second-quarter profits gave markets a boost on Thursday. But the more optimistic mood has begun to wane after Merrill Lynch posted a bigger-than-expected loss.
Merrill Lynch posted a $4.89 billion quarterly loss after writing down soured debt, and unveiled plans to sell billions of dollars of assets - including a part of its lucrative brokerage business - to shore up capital. Moody's Investors Service cut its debt ratings on Merrill by one notch to A2, citing four consecutive quarters of sizeable losses from bad mortgage debt.
"Considering the severity of losses reported by Merrill's today's tone is more than likely to be set by their results," Jim Reid, a credit strategist at Deutsche Bank, said. A weak profits outlook from Microsoft, disappointing earnings from Google and a profit warning from Belgian supermarket group Delhaize added to the more negative tone.
Delhaize shares fell more than 15 percent, but there are no credit default swaps on the company that trade. Nonetheless, its 2008 profit outlook cut, weighed on debt protection costs of other European retailers. Five-year CDS on Ahold were about 5 basis points wider at 122.5 basis points while CDS on Casino and Carrefour were also a couple of basis points wider, a trader said.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 118.1 basis points more than similarly dated government bonds, 1.7 basis points higher on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was steady at 4.377 percent. The 10-year Bund yielded 4.456 percent, also flat on the day.