Credit recoils from bumper jobs report

More jobs being created in the US is now a bad thing, if the credit market reaction to Friday's non-farm payrolls report is any guide.

The US economy added 195,000 jobs in June, about 30,000 more than consensus estimates. Previous months were also revised upwards by a not inconsiderable 70,000. The Obama administration will no doubt be pleased that the labour market is showing some vigour.

But the credit markets were less impressed. The Markit iTraxx Europe was 2.5bps tighter at 109.5bps prior to the NFP release - two hours later it was 3.5bps wider at 115.5bps. The index recovered slightly towards the close, but it was clear that the reaction was negative.

In normal circumstances, the strong jobs figures would have triggered a rally. But we are living in unconventional times thanks to the policies being pursued by central banks, not least the Federal Reserve.

The pace of quantitative easing is dependent on the performance of the labour market, and today's bumper report could persuade the Fed to bring forward its tapering of quantitative easing. This scenario spooks the markets, which have become accustomed to extraordinary amounts of liquidity sloshing around the financial system.

Of course, one month's data is not that meaningful in isolation, and the NFP has a sizeable margin for error of 90,000. But there do appear to be "continuing gains in labour markets" that the Fed is looking for, so we may find out sooner rather than later if the market can cope without QE.

The headlines today give the impression that investors are fixated on the US. However, the eurozone crisis reared its ugly head again earlier this week when Portugal's government appeared to be on the brink of collapse.

Two senior ministers in the coalition government resigned in the face of public disaffection with the government's austerity policies, causing the sovereign's CDS spread to rocket to 500bps.

The prospect of a snap election is probably a frightening one to the two parties making up the coalition, and reports indicate that the prime minister is desperately trying to keep the government intact. But the situation is fragile, and spreads are still at the elevated level of 480bps.

Some commentators have doubted the validity of eurozone sovereign CDS following the EU ban on naked short positions last year. Volumes have clearly dropped over the last year, though the ban is certainly not the only reason behind this trend.

However, Markit data shows that liquidity is still fairly robust in Portugal and other peripheral sovereigns. Portugal is trading with a bid/ask spread of around 20bps, an increase of about 8bps from a few weeks ago, but comparing favourably with levels seen before the ban was on the horizon.

It is often forgotten that many participants are exempt from the ban, and the terms leave room for investors with correlated exposure to the country.

Sovereign names are the most active in the CDS universe, according to DTCC data. They may not be the instrument du jour that they were at the height of the eurozone crisis, but sovereign CDS are still a very useful product for both the buy- and sell-side.

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