European credit spreads narrowed on Thursday after data unexpectedly showed a strong rise in US retail sales, offering a rare piece of bright news on the economy, while oil prices also eased off highs. By 1525 GMT, the Markit investment-grade iTraxx Europe index was at 88.25 basis points, according to Markit data, almost 5 basis points tighter versus late on Wednesday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 15 basis points tighter at 480 basis points. Sales at US retailers rose a much stronger than expected 1 percent in May as consumers took advantage of government tax rebates to spend more. The news helped lift US stocks, just a day after inflation fears drove share indexes sharply lower.
"The retail sales data has helped, but the rise is on the back of tax rebates so whether it is sustainable is debatable. It depends how much of the rebate has been spent in one go," said Magdalena Malinowska, a credit strategist at Barclays Capital.
"We may get some more positive data on the consumer but long-term we are fairly negative," said Malinowska, predicting that credit derivative indexes were likely to remain range-bound over the next couple of weeks. Other economic data on Thursday showed conditions in the jobs market are deteriorating and served a reminder that the US economy remains vulnerable, particularly as oil prices remain close to all-time highs above $139 a barrel hit last week.
Soaring commodity prices have sent jitters across credit markets on fears that major central banks will be forced to raise interest rates to quash price pressures even as the global economy continues to weaken. Oil fell nearly $3 a barrel on Thursday, however, reversing some of the previous session's hefty gains that were spurred by a fall in US fuel stocks.
Bob Parker, vice chairman of Credit Suisse's asset management arm, expects the price of crude oil to reverse to $100 to $120, probably some time in the third quarter. There are already signs that demand for oil is waning in Europe and the US in response to high prices, he said. The US economy is also unlikely to see a sustained recession mainly because of low interest rates, the rapid growth of money supply and intervention by the US Federal Reserve in the interbank market, he said. "Some of the data we have seen out of the US, like the ISM, is consistent with more moderate growth, and not sustained inflation," Parker said.