EUR CDS Flow - CDS tighter on Fed cut hopes, strong earnings.
Informa Global Markets - Bondwatch Morning Insight (Europe) (October 26, 2007)
The CDS market ground tighter on Monday driven by generally strong corporate earnings, rising equities and speculation over a possible US rate cut at the end of the month. In the single name market, traders said that volumes were light and that this was expected to remain the case until the Fed rate decision on 31-Oct. There was a deluge of corporate Q3 earnings, with the majority of results showing positive gains.
The paper makers were once again in focus with Q3 releases from Stora Enso, M-Real and Metso. 5Y CDS on Stora Enso was 20bp tighter at 107/117, with trade at 115, and its shares rose 5.57% on Wednesday's close after the company said that it would cut production capacity by closing mills in Finland and Sweden. Stora said that this would cut costs by EUR 140-160mln annually from 2009. CDS tightened on hopes that a reduction in capacity would lead to a rise in paper prices. Stora added that it would continue to cut capacity if wood prices continued to rise. In recent years the paper makers have been unable to pass on higher wood costs due to overcapacity in the market, which has kept paper prices low. Shares in the other major paper makers also rose on the news. 5Y CDS on UPM-Kymmene moved 8bp tighter to 86/94 and on Norske Skog 5Y CDS was 20bp tighter at 315/330.
M-Real reported that Q3 operating profit rose 56% Y/Y sending its shares 9% higher and its 5Y CDS was 35bp tighter to 560/570. A trader remarked that the paper makers still had a lot of issues to face and the high wood prices and over supply would not be disappearing over night. The contact said that he saw no positive elements in the medium-term, adding that North American competitors are in a better position than there European counterparts. The fortunes of Metso were the opposite of the paper-makers, to which it supplies machines, as its shares fell 8% on Wednesday's close and its 5Y CDS remained flat at 42/47, after it reported below forecast profits. There were some mixed earnings
In the TMT sector with France Telecom reporting a healthy 3.5% Y/Y in Q3 sales on a comparable basis, but Telenor missed forecasts and Ericsson reported a decline in profits. 5Y CDS on France Telecom was flat at 28/29, but its shares rose to a 5yr high on the back of its results. 5Y CDS on Telenor was also flat at 31/33 after it said that Q3 EBITDA fell 14% excluding Kyivstar and cut its sales growth target for the year. Ericsson confirmed what it had announced on 16-Oct, as it reported a 36% decline in Q3 operating income. 5Y CDS on Ericsson was 1bp wider at 45/48.
Traders said that 5Y CDS on Daimler was 2bp tighter at 25.5/28.5, trading at 26, after it posted a 4% Y/Y rise in Q3 EBIT. 5Y CDS on Renault was also 2bp tighter at 37/39 after late on Wednesday saying that Q3 sales rose 4.5% Y/Y.
In the Industrial sector the results of ABB stood out as it said that Q3 EBIT increased 55% Y/Y due to strong demand. 5Y CDS on ABB was unchanged at 29.5/34.5.