Saturday, 30 July 2011

Is the policy of achieving a high home ownership rate the biggest threat for an economy?

Is there a correlation with current sovereign issues with the homeownership rate? As one can see from the graph below, countries in Europe with the highest homeownership rate are currently countries facing the most pressure.

Source "naked capitalism" blog.

Ireland, Greece, Portugal, Spain and Italy, all have very high home ownership rates.
All of these are currently experiencing tremendous pressure on their sovereign spreads.

The issue with enticing a high home ownership rate is the level of household debt it generates as illustrated by the McKinsey report published in January 2010. A must read.

Household leverage measured as debt/income increased the most during the the housing credit fuelled bubble:

Most of the growth in debt was not in the financial sector during the credit bubble according to McKinsey:

The growth in lending was concentrated in residential mortgages as highlighted by McKinsey's study.

The cost of enticing home ownership in the UK is all very clear in the below graph:

Finally the sectoral composition of debt differs across economies:

In a previous post "Extend and Pretend" - Banks bloated balance sheets and the Impact of Real Estate crisis, I mentioned the following:

"Property is widely seen as a safe asset. It is arguably the most dangerous of all, says Andrew Palmer"

It can be argued that the most toxic of all bubbles is a housing/property bubble. They also always generate a financial crisis when they burst due to the leverage at play. How the risk can be mitigated? By forcing players to have more skin in the game.
Recently Sweden passed a law limitating the maximum Loan to Value (LTV) to 85%. In effect, Swedish people will need to put down a minimum of 15% of deposits to borrow 85% of the remainder.

Historically, in the US home ownership levels have been between 63% and 66% since the 1950s, only recently US home ownership has spiked to nearly 70% because of the credit bubble and its ultimate bust. What is currently happening with continuing falling prices in US house prices is a simple reverse to the mean. Everyone expects rising rents and declining apartment-vacancy rates to give housing market a welcome boost. Although buying in the US appears now more affordable, and 30 years fixed-rate mortgages have reached very low levels, given the current glut of vacant homes, where have not reached that point yet. Also, when reversing to the mean, markets often tends to overshoot. About 10% of 130 million homes in the US remain empty.

In Germany, historically, home ownership is notoriously lower. It was 43% in 2008. UK and the US were at the same level in 2008-2009, around 70%.
Germany's low home ownership rate stems from various factors, weaker population growth, very strong tenant rights, as well very heavily regulated mortgage market.

How Germany Achieved Stable and Affordable Housing - from the blog "naked capitalism".

Here is an extract of the conclusion of the article comparing the UK and German home ownership rate:

"The contrast between the German and UK housing markets couldn’t be more stark.

Unlike Germany, the UK housing market is essentially a bubble factory. Wheras Germany’s highly responsive supply ensures that extra demand manifests itself in rising new home construction rather than increased prices, the opposite is the case under the UK’s restrictive land-use policies.

The UK’s deregulated rental market and lack of tenure has also ensured that renting is a second rate option, thereby encouraging residents to strive (and borrow big) for owner occupancy. And of course the UK’s lax financial system has been only too happy to oblige, providing households with no deposit mortgages during the boom followed by rationed credit during the bust.

When all these factors are combined, is there any wonder why Germany’s home prices have remained stable and affordable, and free of the speculative behaviour, ’panic buying’ , and price volatility inherent in the UK system?

It’s a shame that Australia has inadvertently adopted the worst aspects of the UK housing market, namely: the UK-style planning system, complete with similar vertical fiscal imbalances with respect to federal, state and local taxation revenues; a deregulated rental market offering insecure tenure; and a deregulated mortgage market that provides low deposit finance at generous multiples of income."

Australia is facing the same issues relating to its housing market as the UK have been facing.

But in addition to the author of the post's conclusion, German banks opt to lend money first to its industries before housing, and it does make a very big difference in the economic growth and competitiveness between the UK economy and German economy. A lower ownership rate in Germany has been beneficial in reducing the impact of the economic recession and the speed of the bounce back as shown in the below graph relating to German GDP growth:
Germany GDP Annual Growth Rate
and the UK GDP growth during the same period:
United Kingdom GDP Growth Rate

The credit crunch has caused a massive surge in UK and US unemployment. In times of economic expansion, countries like Germany doesn't reap the benefit of a strong and booming real estate market. But a government adopting a cautious stance in relation to home ownership rate in conjunction with stronger regulation and countercyclical measures such as the ones which have been successfully implemented in Canada (see previous post relating to Canada), will have more stability in times of economic recession.

One could argue, that home ownership should not be recklessly encouraged by politicians as it does appear to be a "Weapon of Economic Destruction" (WED). If people are struggling to raise large deposits required to secure a mortage, should the government encourage them to leverage too far in the first place? The recent credit bubble burst in the US and the subprime debacle, highlights the dangerous results in the incestual relationship between politicians and banks, and the promotion of the "American Dream" at all cost.

End of the day, falling house prices, high unemployment and negative equity have a big impact on US labor mobility in particular and the US economy in general.

Macro and Markets update - Combat stress reaction (CSR), the Danish standoff and much more!

Combat stress reaction (CSR) or post-traumatic stress disorder. It is probably what most are feeling after an epic month of July.

From the dowgrades of Portugal, additional dowgrades on Greece and Ireland, contagion to Italy, ongoing debt ceiling debate in the US, European banking stress tests,new European plan for Greece, poor economic data, and now threat of downgrade on Spain from Moody's, I am glad it is the end of the month and the week-end.

On Friday we have had some poor data coming out of the US in relation to GDP. The stand off goes on for the US debt ceiling goes on and we had Moody's adding some extra spice whith a threat of downgrade on Spain. And of course in that relaxed and friendly environment, Gold is making new highs.

Can someone please press pause?

Markets update:
Sovereign 5 year CDS in core countries, Denmark starting to feel the heat...
[Graph Name]
Denmark's sovereign CDS is now at 86.83 bps, rising 18.29%, widening by 13.43 bps according to CDS data provider CMA.

Update on the Danish situation:
Denmark's risk perception has reflected by the CDS market, has been increasing after S&P said that as many as 15 Danish banks could default.
Denmark is at war with the rating agencies. Very recently Danske Mortgage Unit sacked Moody's and declared it might hired Fitch:

Danske Unit Sacks Moody’s, May Hire Fitch - Bloomberg
On the 23rd of June, another Danish banked at sacked Moody's:
"Realkredit Danmark sacked Moody’s on June 23 after being told to provide an extra $6.14 billion in collateral to keep its covered debt graded Aaa."

The fight is on.
"Moody’s argues that Denmark’s adjustable-rate mortgage bonds represent a bigger refinancing risk because they, unlike other Danish covered bonds, don’t match the maturities on the loans linked to them. The adjustable-rate bonds tend to have maturities of one to three years compared with an average loan maturity of 20 to 30 years."
Fact is Denmark has one of the best mortgage system in the world.

The issues relating Danish Mortages bonds are tied to BASEL III. Will the EU classify danish mortgage bonds as highly secure and liquid (level 1 securities) like government bonds?
Denmark has the third largest mortgage bond market after the United States and Germany. Excluding Danish Mortgage Bonds from "Level 1" securities would trigger a sell-off and put the entire Danish Banking system under pressure (the current liquidity pool of Danish banks is made of 85% of Danish Mortgage Bonds and only 15% of Government bonds).

So far the EU has postponed its decision until 2015:

EU postpones key decision for Danish mortgage bonds - Reuters

The rating agencies are taking a very agressive stance relating to the Danish Mortgage Bond markets which is not entirely justified given the ongoing discussions between the EU and Denmark about its very specific and unique banking system.
As a reminder, the Danish mortgage markets is based on the "Principle of Balance":
Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. The Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. For more on the subject of mortgage systems, and housing, you can check previous post "Are Fannie Mae and Freddie Mac on the path to a crash à la Thelma and Louise?"

Back to our market update!
The SOVx, which represents the index for Sovereign risk in Western Europe and comprising 15 countries including Greece, is drifting wider again:

Same story for the index representing corporate credit risk, Itraxx Main Europe 5 year index (containing 125 names rated at least investment grade):

But in relation to corporate leverage and debt, although companies are already facing margin compressions due to rising commodity prices, company debt in 2012 will slide to its lowest level since 1996 according to a study made by Societe Generale. Some are still deleveraging but most are sitting on a pile of cash and have managed to control and reduce costs (lean and mean?).
Source: Company Debt in Europe Will Slide to Lowest Since 1996: Chart of the Day - Bloomberg.

"Companies’ net debt as a proportion of earnings before interest, taxes, depreciation and amortization will fall its lowest level since 1996 next year, according to Societe Generale."

"The ratio of European companies’ debt to Ebitda will fall to 0.8 in 2012, according to Societe Generale. The last time that corporate debt dropped below Ebitda, European stocks rallied 154 percent over the following five years."

But at the same time, there is a lot of uncertainties due to sovereign issues, with the ongoing European debt issues and the current US debt ceiling debate.
The US 1 year CDS spread is now trading above the 5 year point, although the curve is inverted, there is no need to panic given the level of the spread indicates a very low probability of default (around 6% over 5 years):

But with the ongoing turmoils, "Risk off" is still the game "du jour".
Vix climbing up steadily, not yet reaching March levels but getting close:

Time for some Macro updates:
The great shock was the release of the US GDP figures for the second quarter as well as the revised figure for the first quarter. Truly appalling. GDP climbed 1.3% at annual space, from an median forecast of 1.8%, but following a 0.4% revised gain in the prior quarter! Revisions to GDP figures indicates that the 2007-2009 recession shrank 5.1% from the fourth quarter of 2007 to the second quarter of 2009, compared to a previously reported 4.1% drop. The second worst contraction in post WWII era was a 3.7% decline in 1957-1958 according to Bloomberg.

Household purchases, which represent 70% of the GDP rose at 0.1%. Slower job growth increases the risk for the second semester. Next week employment figures with the NFP (Nonfarm Payrolls) will be essential and so will be the ISM figures release. There is an increased risk of double dip for the US economy. Massive spending cuts would strike another blow to a faltering US economy.
I pointed out we had stagflation in the UK in my previous post, the US is as well stuck in a stagflationay environment.

The Chicago ISM's business barometer fell to 58.8 in July from 61.1 in June. Figures above 50 signal expansion. The median forecast was for a 60 print.

The US debt ceiling debate will certainly add on company's reluctance to hire in this environment.

So, yes it still "Risk Off" for the time being.

To be continued...

Thursday, 28 July 2011

Macro and Markets update - no time for some summer R&R (Rest and Recovery)

A lot of things going on at the moment, it is just full on. No time for some nice summer R&R and in addition to the turmoils, here in Europe, we can't really say we are basking in the sun...So much for global warming...

The macro picture isn't great. In this post we will quickly go through some recent economic releases as well as some markets updates.

Market update - In the Credit Default Swap (as a reminder for the non market practitioners, CDS are good indicators of rising risk in the credit space and sovereign space, the 5 year point being the most liquid part of the CDS curve):
Italy is still a concern:
[Graph Name]
Italy Sovereign 5 year CDS is widening again, even after the strong tightening squeeze we witnessed last Friday, following the new European plan to tackle the ongoing issues related to Greek debt.
What is interesting is the fact that Italy Sovereign 5 year CDS is wider than financial CDS (Intesa and Mediobanca) and wider than its main Utilities company Enel.

In fact it has been a while since Sovereign 5 year CDS has been trading wider than Financials in General in some countries, and Financials trading wider than some corporate names. At least it is the case with the most common credit indices widely use in the market space, the Markit Itraxx credit indices:
SOVx Western Europe 5 year index is trading wider than Itraxx Financial Senior 5 year index, 270 basis points versus 175 bps.
Itraxx Financial Senior 5 year index is trading at 270 bps versus the Corporate index Itraxx Main Europe 5 year at 116 bps, meaning corporate credit is perceived to be less risky than both Financials and Sovereign European Countries. The Itraxx Main Europe index comprised 125 names. The members of the index are changed every 6 months. The Itraxx Europe is composed of the most liquid 125 CDS referencing European investment Grade credits (above BBB-).

The ongoing debt ceiling US debate is taking it's toll on USA's 5 year Sovereign CDS as well as its financial sector:
Spiking to 62.47 bps. No reason to panic yet.
As a point of comparison, according to data provider CMA, Italy 5 year CDS is trading at 302 bps today, 28 bps wider, representing a Cumulated Probability of Default (CPD) of 23.44% over 5 year. Spain is at 350 bps, 17 bps wider on the day with a CPD at 26.5%.
In relation to the USA, the CPD stands at 5.28% so far. Much ado about nothing.

US Financials 5 year CDS drifting wider:
Daily Focus Graph

Given the ongoing "Risk Off" mode, the Vix index is as well rising, but, not as significantly as during May 2010, where in one month it moved from around 17.5 to 45.
Vix above 22, yet to reach March high.

In the Government Bond space, 10 year government bonds have started to drift again higher:
Italy's 10 year goverment bond is following its CDS, going wider on the day, 15 basis points, reaching a yield of 5.889%.
Spain, as well is wider by 10 bps, reaching a yield of 6.023%.

In the 2 year segment for Government Bonds, here is the picture today:
Greece 2 year notes fell to 25% last Friday, but, is again drifting wider, after a small respite, to 28.717%, wider by 97 bps on the day.

Macro update - not great...

UK GDP came at a mere 0.2% Quarter on Quarter. Can you spell stagflation? It has been the ongoing theme on this blog since the beginning in relation to the UK economic situation.
United Kingdom GDP Growth Rate
Thanks to Trading Economics, this is the macro updates we have for the UK economy.
GDP decreased from 0.5 last quarter to 0.2 for the second quarter of 2011. The UK economy is dangerously close to relapsing in recession and reaching stalling speed.
The production industries fell 1.4% compared with a decrease of only 0.1% in the previous quarter.

UK Industrial Production, here is the picture:
United Kingdom Industrial Production

US employment level is still the big issue for the US economy and the biggest headache for President Obama and Ben Bernanke:
United States Non Farm Payrolls
But Housing as well is still an ongoing problem, with New Home Sales at 312K, against 320K expected and a previous 315K.
Core Durable Goods Orders (Month on Month) came at a weak 0.10%, 0.50% expected, 0.70% previously.
The big disappointment was Durable Good Orders (MoM) at -2.10%, 0.40% expected, 1.90% previously.
Today we had a small relief with Initial Jobless Claims falling to 398K, 412K expected, 422K previously.

With weak Durable Good Orders, manufacturers are going to put recruitment and production on hold for the time being. Manufactures face a slowdown in consumer spending. Household spending still represents 70% of the GDP.
Do we have a temporary slowdown?

Next week on the 1st of August we get the very important ISM Manufacturing Index. A print below 50, would mean recession time. We are also getting ADP Nonfarm Employment Change on the 3rd of August and the ISM Non Facturing Index. Finally on the 5th we will get the US Unemployment Rate and the Nonfarm Payrolls.

Stay tuned...

In the meantime, here is Bloomberg's chart of the day, and relates to the how our "bright" politicians are solving the European debt issue, a visualisation of "kicking the can down the road":


Sunday, 24 July 2011

Macro and Markets update - Peripheral debt - Rally Monkey!

Friday saw some massive tightening in the two years segment of Periperal government bonds:
Nope, not a typo, thanks to the European "n" plan to tackle the issues with Greek Sovereign debt in particular, and peripheral debt in general, 2 year Greek bonds rallied strongly by 614 bps when I took this snapshot. At some point they even rallied 800 bps! Portugal 2 year notes as well tightened by 184 bps and Irish two year bonds by 419 bps on the day.

On the 10 year segment for European Government bonds, the action was more muted:
Greek 10 year bonds tightened by 175 bps, Portuguese bonds by 72 bps and Irish 10 year bonds by 44 bps.

On the Sovereign CDS space, the action was more radical on the 5 year segment, the most liquid part of the market:
GREECE 1440-1650 -250 bps tighter      upfront market quote 39/42
SPAIN 305/315 +2 bps wider
IRELAND 850-900 -40 bps tighter                   
PORTUGAL 880-940 -10 bps tighter                   
(source, one dealer run).
The all time high for Greece was 2,568 bps on the 18th of July.

Credit Indices as well were tighter accross the board:
From its recent high of 309 bps, SOVx index has now tightened to 260 on the year point which is not surprising given the tightening move we have seen for some of its members (Greece, Portugal, Ireland).

According to Fitch, Greece, faces a "Restricted Default" following the meeting held on the 21st of July which comprise a new plan of 159 billion euro. It requires private bondholders to assume part of the cost. The proposed plan implies a 20% net present value loss for banks and holders of Greek Government debt.
The new plan is made of 109 billion euros from the Euro-zone and the IMF, and 50 billion euros coming from financial institutions, with bond exchanges and buy backs, which is expected to reduce the debt burden for Greece. The EFSF 440 billion euro fund will be able to buy debt accross the peripheral countries and aid troubled banks with credit-lines.

So, will we have a credit event, triggering pay-off for Greek Sovereign CDS protection holders?
The International Swaps and Derivatives Association said participation of private bondholders in the Greek rescue plan "should not trigger credit-default swaps" because it is "expressly voluntary" according to David Geen, ISDA's general counsel in London.

More on the new European plan:
Greece will receive loans from EFSF at rates close to swap rates but not below the EFSF funding costs (expected to be around 3.5% - 3.7%) for 15 years or longer. Coupon will therefore be lower on bonds, and the maturities extended. This is indeed more positive given that the average interest rate on all debts will be lowered, which will imply Greece to run a smaller primary surplus to stabilise its debt. Overall its alleviates the debt pressure on the Greek economy, but doesn't fully resolve the solvency risk.
In relation to the EFSF size, markets are already questioning the fact it has not been increased to keep the fund in a position to rescue Spain if needed.
The big unknown in the new plan lies in the private participation rate which is assumed to be as high as 90%. Nothing, so far has been explained on how this participation rate will be achieved.

It is another successful "kicking the can dow the road" solution. It doesn't fully address necessary debt relief in the near future, but tries to avoid at all cost a triggering of sovereign cds payments by involving the private sector in a "voluntary" way with the support of ISDA (so much for buying CDS for an accident which is happening, but is not "really" happening since the private sector is willing to participate...). Conclusion, when you don't like the rules relating to credit events, just change the rules...

Moral of the story: "If you can't win the game, change the rules".


Thursday, 21 July 2011

Macro and Markets update - It's all gone Pete Tong...

"The phrase "It's all gone Pete Tong", where the name is used as rhyming slang for "wrong", was reputedly first coined by Paul Oakenfold in late 1987 in an article about Acid House called 'Bermondsey Goes Balearic' for Terry Farley and Pete Heller's 'Boys Own' Fanzine."

Bloomberg chart of the day:
Gold and the US Debt ceiling.

Meanwhile in the US, how do consumers face rising costs, lower wages and so forth? The answer cards!
Consumers in U.S. Relying on Credit as Inflation Erodes Incomes - Bloomberg

"The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.’s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor.

Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem.”

Rising costs of food and gasoline are leaving Americans less money to spend discretionary items, slowing the pace of the recovery, Tavares said. Household spending accounts for about 70 percent of the world’s largest economy."

Also in the article:
"The volume of gasoline purchases placed on credit cards jumped 39 percent last month from a year earlier, compared with a 21 percent increase in June 2010, he said. Food shopping increased 5 percent after falling 7 percent last year."

Here is what's going on:
FRED Graph

Total Consumer Credit Outstanding, from deleveraging to releveraging...
FRED Graph

Even if the average price of a gallon has dropped 7.6% from the 4th of May, which was a three year high, even if tapping the strategic oil reserves, has helped in the short term to alleviate the pressure on prices, it is not enough to address the cash flow issues faced by Joe Six-Pack aka the US consumer:
The struggle to eat - The Economist - 14th of July.

"As Congress wrangles over spending cuts, surging numbers of Americans are relying on the government just to put food on the table."

"Participation has soared since the recession began (see chart). By April it had reached almost 45m, or one in seven Americans. The cost, naturally, has soared too, from $35 billion in 2008 to $65 billion last year. And the Department of Agriculture, which administers the scheme, reckons only two-thirds of those who are eligible have signed up."

Who is benefiting form this much needed form of aid?

"Only those with incomes of 130% of the poverty level or less are eligible for them. The amount each person receives depends on their income, assets and family size, but the average benefit is $133 a month and the maximum, for an individual with no income at all, is $200."

"About half of them are children, and another 8% are elderly. Only 14% of food-stamp households have incomes above the poverty line; 41% have incomes of half that level or less, and 18% have no income at all. The average participating family has only $101 in savings or valuables."

And the article to conclude:
"When Moody’s Analytics assessed different forms of stimulus, it found that food stamps were the most effective, increasing economic activity by $1.73 for every dollar spent. Unemployment insurance came in second, at $1.62, whereas most tax cuts yielded a dollar or less."

And if you think the US credit card binge is only a US problem, it isn't. It is happening in the UK as well.

A quarter of Britons can't survive the month without credit cards - Jessica Bown

"A quarter of struggling British workers regularly rely on their credit cards when their cash runs out, with the average person pulling out the plastic just 21 days after being paid each month, according to a new survey from comparison website Moneysupermarket."

Dear Ben Bernanke, I know you and your friends are thinking about QE3 given poor economic data and high unemployment, before you go ahead, think about the impact it would have on Joe Six-Pack...
Because, if you think a surge in credit-card usage is a sign of surging consumer confidence, think again...

Monday, 18 July 2011

Macro and Markets update - No test, no stress, no stress, no test...

All is in the title, as clearly Mr Market has not bought into the latest results for the European banking sector stress test. EBA's assumption of a 15% loss on Greek bonds and a 1 to 2 percent "haircut" on Irish and Portuguese debt, cannot be deemed serious.

Eight European banks failed the European Banking Authority's stress test: five from Spain, two from Greece and one from Austria.
Most were smaller banks. The aggregate shortfall was measured at 2.5 bln euro, but the EBA points indicated that the system raised 50 billion euro of capital between January and April this year, for the positive side.
16 banks have a projected Core Tier 1 between 5% and 6% at end-2012. Raising the threshold to 6% would mean a shortfall of over 10 billion euro.

Stress test puts banks' euro zone debt in spotlight

"The EBA data showed banks held 98.2 billion euros of Greek bonds (67% held by domestic banks), 52.7 billion euros of Irish sovereign debt (61% held domestically) and 43.2 billion to Portugal (63% at home). Applying more realistic losses of 40% on Greek bonds and 25% on Portuguese and Irish debt would add over 45 billion euros to capital needs."

Here is the picture for Italy in the CDS space as seen on Friday:
[Graph Name]

Update on Spanish Sovereign 5 year CDS as of the 18th:
[Graph Name]

France still leading the pack of Core Sovereign CDS 5 year movement:
[Graph Name]
France is now trading above 120 bps, as I previously posted, France is now at the same level Italy was in April 2011.

Portuguese 5 year banks CDS, following the results, well as expected, wider:
Daily Focus Graph

As well some Italian banks in the mix:
Daily Focus Graph
Swaps on Spanish and Italian banks led the rise in financial debt risk, with Banco Popular Espanol SA soaring 72.5 basis points to 648 and Mediobanca SpA up 22 at 238, both records.

For the SOVx 5 year index, here is the picture of the widening we have seen so far:
As a reminder, 1/15th of the Index is made of Greece, same applies for Portugal and Ireland.

Government bonds update, the 2 year picture - it ain't pretty for some...
Greece 2 year at 31.7%, Portugal at 18.24%, Ireland at 21.5%.

And here is the 10 year Government bonds morning snapshot:
Italy 10 year now closed to 6% (highest level since 1999, new week, new record), Spain at 6.249%. Greece, at 17.2%, Portugal at 11.87% and Ireland at 13.49%.

Italy approaching 7% would be a cause of concern. The 7% mark prompted its smaller euro partners to seek bailouts, namely Ireland, Portugal and Spain and Italy's economy is three times larger than the combined three. The extra yield investors demand to hold Italian 10 year debt over German bunds widened to 3.48 percentage points last week, the most since September 1996.
The overall Itraxx indices picture this morning was wider as well:
  • The iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 5 basis points to 194 and the subordinated index climbed 8.5 to 338, both the highest since January.
  • The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 10 basis points to 470, the highest since the second of December 2010.
  • The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.5 basis points to 126.25 basis points, the highest in more than a year.
That's the latest and I haven't even mention the action on the equity space. Nasty as well.

On a final note, Bloomberg's chart of the day today was an update on the Misery index:

 A 28 year high according to ZeroHedge.
"The CHART OF THE DAY shows the correlation between the U.S.
Misery Index, or the sum of the unemployment and inflation
rates, and measures of consumer confidence."

And it is only Monday...ouch...
To be continued...unfortunately...

Wednesday, 13 July 2011

Macro musing - European debt crisis saga - Clear and present danger

Sometimes a picture is worth a thousand words:
Greece, Ireland and Portugal, clear and present danger in the Eurozone crisis, with some contagion already spreading to Italy and Spain.
And another picture, as well, quite interesting - Currency performers year to date.
Currencies top performers against the USD this year so far.

Swiss Franc = Flight to quality, safe haven status. Greek deposits fleeing Greek banks for Swiss havens.
Canada, Sweden, Norway = sound economies, safe risk.
Australia = big commodity currency like the Canadian dollar.
To be continued...

Tuesday, 12 July 2011

Markets update - Credit - Rates - Equities - Dude where's my flak jacket?

That Subprime contagion feeling in the market for the last two days...

Huge movements in the European government bonds space.
In the two year bucket in the morning:
Italy and Spain getting punished, wider respectively on the 2 Year notes by 32 bps and 30 bps.
Italy 2 year notes is wider by 272 bps this year so far.
Spain is wider by 174 bps so far this year.
In the 10 year bucket in the morning:

France is wider by 75 bps versus Germany on the 10 year government bonds. This is getting interesting. Portugal and Ireland, correlation is super close to 1, on both the CDS and the 10 year yield level, respectively yielding 12.28% on the 10 year and 12.747%.

The 5 year Sovereign CDS picture is even more blatant on today's price action:
[Graph Name]
France is drifting away from the core European countries and its 5 year CDS level at some point today was being quoted 115-120 bps on the 5 year level, bringing it to the same level Italy reached back in April this year.

In relation to Portugal and Spain, the 5 year CDS spread for Portugal is continuing its meteoric rise:
[Graph Name]
At 1200 bps, things are turning ugly.

When it come to Credit indices - here is a snapshot of this morning main credit indices levels:
Crossover indices wider by 30 bps on the 5 year.
Itraxx Financial 5 year Senior close to 200 bps whereas Itraxx Financial Sub 5 year at 345 bps, 145 bps wider than the Senior Index level.
Sovx Western Europe touching a new high at 310 bps on the 5 year level, bearing in mind Greece is 1/15th of the index, also affected by the widening of Portugal, Ireland, Spain, Italy, France and co.

From a Macro point of view, interesting to see in the SovX indices, that Western Europe is currently trading 170 bps wider than Asia Pacific and 70 bps wider than CEEMEA (Central Europe and Middle East and Asia).

And Moody's keeps piling it on, Ireland just cut to junk (Ba1 from Baa3) with negative outlook.
"The key driver for today's rating action is the growing possibility that following the end of the current EU/IMF support programme at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals."
Cut and paste from the 5th of July Portugal downgrade note from Moody's?

In a related rating action, Moody's has also today downgraded by one notch to Ba1 from Baa3 the long-term rating and to Non-Prime from Prime-3 the short-term rating of Ireland's National Asset Management Agency (NAMA), in charge of dealing with the toxic assets previously transferred from the banking sector.

Also in the news, a selective default for Greece according to an official speaking on the sidelines, is no longer off the table. Germany inflation rate held at 2.4 percent from May. UK inflation came out at 4.2% in June year on year, smallest rise since March 2011, but only a temporary respite.

QE3 more likely? At least that's what the latest price action in Gold would suggest, reaching a new high of 1577 USD and the trade deficit in the US reached 50.2 billion USD in May (Oil and China factors).

And equities? Well, major roller coaster day, financials and insurers, leading the downward price action for the last two days, more of the same today.

FX also very agitated with USD/JPY at 79.4205, down 1.05% on the day.
EUR/USD down to 1.3973, a 0.40% drop.

Sticky gum deal of the day:

It looks like New-York Attorney General Eric Schneiderman has sent letters to 20 companies including Goldman Sachs, BlackRock in relation to their participation in the 8.5 billion USD mortgage settlement agreement between Bank of America and Bank of New-York Mellon Corp. But, at least Bank of America has reached a settlement on Monday with Bond Insurer MBIA Inc. relating to insurance-like products sold by Merrill Lynch previously to MBIA Inc.
Bank of America hit a fresh new 52 weeks low at 10.20 USD on the news.

Who said summer was nice and quiet?
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