Caterpillar's disappointing results dampened the positive mood and led to European credit giving back its early gains.

The US construction equipment maker reported earnings per share of $1.45, well below expectations of $1.68, and revenue also came short of consensus estimates. More worryingly, the company cuts its full-year EPS forecast to $6.50 from $7, the second successive quarter that it has revised its profit guidance.

Caterpillar blamed declining demand from the mining industry and equipment dealers using less inventory. Sales from Australia were down significantly, and this inevitably raises questions about the effects of lower economic growth in China. The company remained relatively bullish in its outlook, stressing that end-user demand was similar to its previous forecast.

But credit markets still reacted negatively, with CDS widening 8bps to 85bps. Caterpillar has underperformed this year due to its exposure to China, something that used to be seen as a strength.

Nonetheless, it should be stressed that Caterpillar has a robust balance sheet, and today's results did nothing to change that. Cash flow is strong and improved over the quarter due to inventory reduction. The guidance miss was perhaps more relevant to equity than credit.

China, though, is a looming presence not just on Caterpillar but on the entire global economy. Its economic performance has been slowing, and there was further evidence of the trend today with the Markit Flash PMI.

The survey reading for July was 47.7, below expectations and the lowest level for 11 months. How China rebalances its economy way from debt-fuelled investment towards consumption will be one of the key issues in the coming months and years.

Elsewhere, the news was largely positive. The Markit Flash PMIs for the eurozone were better than expected - the headline index was in positive territory for the first time since January 2012. Germany's survey rose sharply, and even France saw some improvement, though it is still below the 50.0 neutral mark.

US earnings - aside from Caterpillar - were also encouraging. Apple beat expectations after the close yesterday, and Ford was one of many companies to exceed consensus estimates.

The Markit CDX.NA.IG index was 0.5bp wider at 75.5bps, while the Markit iTraxx Europe was flat at 99.5bps.

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