The long weekend in the UK and US appeared to have a soothing effect on credit markets as spreads rallied in tandem with equities.

European investors have taken their cue from further afield lately, in particular the recent volatility in Japan. Bank of Japan Governor Haruhiko Kuroda has struggled to send a clear message to the markets, and many are concerned that increasing JGB yields - a by-product of Kuroda's policies - will choke off growth and inflation before they have had the chance to rise.

Kuroda said over the weekend that the country's banks can cope with higher interest rates, and this was welcomed by the markets. However, he qualified his view by stating that the economy would need to improve to offset the negative mark-to-market losses from holding JGBs. The BOJ will hold a meeting with JGB dealers on Wednesday, and it would not be a surprise if it generated market-moving headlines.

Overall, spreads were tighter across the board, with the Markit iTraxx Europe rallying by 4bps to trade at 94.25bps. Banks led the way, and sovereigns also bounced back, after widening on Friday.

In the US, the Markit CDX.NA.IG was 2.25bps tighter at 73.5bps, with widening credits scarce on the ground. Hewlett-Packard was among the strongest performers, continuing its solid run that started earlier this year.

The technology group is on a high after its second-quarter earnings beat expectations and raised its forecast for the year. It still trades with an implied rating of BB, below its BBB average rating and indicative of the many problems it is struggling to come to terms with. HP's CDS were trading at 135bps, 12bps tighter compared to Friday and nearly 100bps tighter than where they started the year.

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