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":


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