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EUR CDS Flow - CDS tightens but sub-prime worries remain
Informa Global Markets - Bondwatch Morning Insight (Europe) (August 3, 2007)

The CDS market showed some resilience on Thursday, as spreads tightened despite the spectre of US sub-prime losses hanging over the market. In the morning the iTraxx Crossover index headed back down to around 400bp (-24bp D/D) and the Europe index settled down to 55/55.25 (-1.25bp D/D). This followed a late rally in US stocks overnight and a tightening in US credit indices, and was despite more reports of sizeable losses being made at US hedge funds. In the single name market traders said that there was a lot of selling from the street as clients looked to offload some of the protection they had purchased over the last week. Contacts noted that the indices were not fully reflecting the selling of protection on the single names. Another source added that the market was waiting for the next big headline to turn sentiment, but that it would have to be an "ugly" story as the market was firmer on Thursday even with some bad news "hanging around".

In the TMT sector shares in Telenor jumped 4.8% on Wednesday"s close and its 5Y CDS was 2bp tighter at 36/41 after it said that it had won a New York arbitration proceeding against Alfa Group concerning violations of the shareholders agreement relating to the companies joint venture in Ukrainian mobile operator Kyivstar. Elsewhere, Nokia said that Q2 operating profit increased 57% Y/Y to EUR 2.36bln. This was helped by a 29% increase in mobile device sales, increasing its market share to 38% from 34% Y/Y, above analyst expectations, its 5Y CDS was unchanged at 14/17 but its shares were up as much as 9% on Wednesday"s close.

Another big mover in equity markets was Unilever, in the Consumer sector, which gained 8% on Wednesday"s close following the release of expectation beating Q2 results and the announcement of increased margins and growing sales. 5Y CDS on Unilever was 2.5bp tighter at 23/26.

There were more earnings releases from the big banks, with Barclays, Credit Suisse and SocGen all on the agenda. Senior 5Y CDS on Barclays was 3.5bp tighter at 29/34 after posting a 12% Y/Y rise in H1 pre-tax profit to GBP 4.101bln, its sub was 3bp tighter at 45/55. Shares in SocGen climbed 6% on Wednesday"s close after it posted a 26.4% Y/Y rise in gross operating income of EUR 2.805bln. Senior 5Y CDS on SocGen was unchanged at 26/29 as was sub at 34/37. Credit Suisse beat expectations as it posted a 70% Y/Y rise in Q2 net income from continuing operations to CHF 3.189bln, but its senior 5Y CDS was unmoved at 35/40 as was sub at 45/55.

The Industrial sector also had a number of earnings releases, among them Lafarge reported that Q2 current operating income climbed 11% Y/Y, ICI said that Q2 group trading profit from continuing operations increased 12% Y/Y and Vinci announced that H1 revenue increased above estimates. 5Y CDS on Lafarge was at 63/68 (-5bp D/D) and Vinci was at 49/55, 3bp tighter D/D, whilst ICI was 49/51 (-6bp D/D). CS



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