Markets nervous ahead of Fed minutes

Markets get nervous when the US Federal Reserve reveals its thinking, so it was no surprise to see credit spreads widen ahead of the latest Federal Open Market Committee minutes due after the European close.

The consensus seems to be that the FOMC will stick to its line from the previous month, which was slightly more dovish than the June minutes. But the exact wording of the discussions has the power to move markets, particularly when the timing of QE tapering is such a cogent factor.

Most expect the Fed to scale back its purchases in September, but if the minutes show that several FOMC members expressed concern about rising rates and the pace of economic activity, this could cause investors to push back their timescale to December.

If officials within the Fed are worried about growth, then existing home sales figures released today may lead them to reassess their views. Sales in July rose 6.5% to 5.39m units, their highest level in over three years. Rising mortgage rates appear to be having little effect on demand for housing, at least thus far.

The US housing market may be on the up, but recent results from retailers suggest that consumers are still struggling. Office supplier Staples was the latest to disappoint on Wednesday, with both earnings and sales missing expectations.

The company also cut its profits estimate for the year, leading to its CDS spreads widening 16bps to 175bps. This is still more than 200bps tighter than where Staples started the year, but its implied rating of 'BB' suggests that the market is still unsure of the firm's investment grade status.

Staples' lacklustre results helped the Markit CDX.NA.IG widen 1bp to 83.25bps, while the Markit iTraxx Europe widened over 2bps to 105bps.

However, most of the recent action has been in emerging markets, and spreads continued to widen today, though not at the same pace as in previous sessions. Where they will end up will be determined by the tone of the Fed minutes.

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