US retailers limit emerging market damage

Strong showings from US retailers on Tuesday helped offset negative sentiment emanating from emerging markets.

The US retail sector hasn't exactly excelled this earnings season, with the likes of Wal-Mart and Macy's disappointing investors, but Home Depot and Best Buy, two chains at opposite ends of the ratings scale, both managed to buck the trend.

Home Depot's results were strong across the board - the home improvement retailer beat estimates at the top- and bottom-line. The firm also raised its full-year guidance, citing the continued improvement in the US housing market.

Home Depot's spreads were unchanged at 35bps following the results, but that is more a reflection of its status as a rock-solid credit rather than market ambivalence. The firm has low leverage for an 'A' name, and it has traded with a superior implied rating of 'AA' for some time, according to Markit data.

The same can't be said for Best Buy, which is rated 'BB' but trades equivalent to a 'B' credit. However, the retailer's spreads rallied sharply today after it also beat earnings and sales expectations. The company's turnaround plan appears to be bearing fruit, and the 39bps rally in its spreads brings the firm's CDS to 265bps, the tightest level since August 2011.

Best Buy might be a junk name, but it is a paragon of credit strength comparedwith JC Penney. The retailer has been in a steep decline for some time, leading to serious credit deterioration in recent years, and the latest results confirmed it is still in dire straits.

Earnings missed already low expectations and revenue declined for the ninth consecutive quarter, but same store sales improved slightly from the previous quarter, and that helped the firm's spreads rally to 18.5 points upfront. This is still significantly wider than where it was trading three months ago.

The positive numbers from US retailers helped the Markit CDX.NA.IG rally more than 2bps to 82bps.

In Europe, the effects of the sell-off in emerging markets were more keenly felt, with the Markit iTraxx Europe losing ground during the morning. However, it recovered to trade flat at 103bps, helped by the US news, but also by a late stabilisation in Indonesia.

Attentions will now turn to the release of the latest Federal Reserve minutes, which should give some clues on the Fed's commitment to taper QE in September.

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