Credit resistant to earnings surprises

US earnings might be dominating the headlines but so far they have had little impact on credit spreads.

The Markit CDX.NA.IG started the week at 64bps; it looks set to end the week just 1bp wider at 65bps and has traded in a narrow range of 2.75bps over the past five days. It was a similar story in Europe, with the Markit iTraxx Europe exhibiting minimal volatility.

Credit is generally less sensitive than equity to corporate profitability, so the lack of large oscillations wasn't that surprising. But the earnings season is only just underway, and there will no doubt be surprises in store that will shift sentiment.

US banks, however, haven't sprung any major shocks. All six large institutions have now reported fourth-quarter results, with Bank of America's better than expected numbers and Citigroup's disappointing earnings the highlights. Morgan Stanley posted results today and, like many of its peers, the headline profit figure was hit by substantial legal expenses. But core earnings - stripping out all the noise - were above consensus estimates. The bank's CDS spreads were unmoved at 87bps.

Outside of financials, profit warnings from two bellwethers slowed positive momentum. In Europe, Royal Dutch Shell shocked many seasoned market observers by issuing its first profit warning in 10 years. The company blamed weaker refining conditions, higher exploration charges and oil theft at its Nigerian operations. However, the news only caused Shell's CDS spreads to widen by just 1bp to 31bp. Shell is a strong AA credit with a robust balance sheet, and, barring unforeseen geopolitical developments, this is unlikely to change in the near future.

US delivery firm UPS also warned that profits would be below expectations. The company said that the compressed peak season between Thanksgiving and Christmas created logistical problems, as did the inclement weather in December. UPS, like Shell, is a solid investment grade credit and is traditionally one of the tightest names in the Markit CDX IG. However, it widened 4bps today to 22bps, which is a large daily move by its standards. Over the last 12 months it has traded in a range of 16-32bps, so today's gyration is nothing to get concerned about.

Looking ahead to next week, earnings will continue to capture attention. Macroeconomic news will also be scrutinised, particularly the data on China. Fourth-quarter GDP figures are expected to show that the Chinese economy slowed towards the end of the year, and the Markit Flash PMI will give the first pointer on how matters are faring this year. Concerns about the Chinese interbank market and the shadow banking system are once again beginning to mount, which we saw last year can have global implications.

Download full article