European credit markets staged a rally in afternoon trade, spurred by higher US equities which helped alleviate some fears about the subprime mortgage market crisis that have hammered spreads in the past two days.
The iTraxx Crossover index was 18 basis points tighter at 278 basis points by 1500 GMT, after a choppy trading session which saw it swing in about a 20-point range.
"Higher equities in the US have helped, it's given the market a push. There was no leadership in Europe today," said Suki Mann at SG CIB, predicting credit markets will remain volatile.
The Dow Jones industrial average hit an all-time intraday high of 13,719.31 on Thursday, up 1 percent and surpassing the previous record high of June 1, as retailers such as Wal-Mart Stores Inc posted better-than-expected sales.
In stark contrast, a series of profit warnings from the likes of home improvements company Home Depot and rating agency actions related to the subprime market, had sent the Crossover to wides of 310 basis points on Wednesday.
Comparisons of this latest sell-off in credit with a surge in spreads in May 2005 helps put some perspective on where credit could potentially go from here, a trader said. That widening saw the Crossover jump to above 470 basis points, following rating agency credit downgrades on General Motors and Ford to "junk" status.
While markets adjust to what appears to be a new trading range around 300 basis points, the worst is by no means over, some say. "The deleveraging downturn could become quite vicious," said Gary Jenkins, a partner at Synapse Investment Management, a credit-focused hedge fund. "People are leveraged up to the hilt." Current turmoil, however, does not seem to have dented appetite for mergers and acquisitions.
Anglo-Australian miner Rio Tinto Ltd/Plc agreed to buy Canada's Alcan Inc for $38.1 billion to create the world's biggest aluminium producer, the two firms said on Thursday. Five-year credit default swaps on Rio Tinto widened to as much as 28 basis points from 16 basis points in Asian trading before heading back to 22 basis points, analysts at RBS said.
Both Moody's Investors Service and Standard & Poor's weighed in with the threat of multiple-notch downgrades for Rio Tinto. The primary market also saw a couple of new mandates. High yield logistics group CEVA plans to issue $1.4 billion of high-yield senior notes in euros and dollars while British rail infrastructure operator Network Rail plans to issue a 40-year inflation-linked bond after the summer.