Friday, 5 August 2011

Markets update - Credit - Rates - Equities - Kneecapped...

Another day in the trench and not even the better than expected employment figures at 9.1% and Nonfarm payrolls (NFP at 117K versus 85K)have been able to sustain a strong rally in the equity space.
The intraday move on some European indices made everyone fill dizzy, or sick. It was fast and furious. In these markets you can clearly age in dog years as in 2008...
In relation to the NFP numbers, while June had come in at a horrible 18K jobs, it was revised upwards to 46K. Very slight improvement but nothing great about it. The average duration of unemployment increased to 40.4 weeks from June's 39.9 weeks as it continues to make a new high each month. 44.4% of those unemployed and still looking for work have been searching for 27 weeks or more. This is not a recovery.

The US economy looks like muddling through but the worries in the European space in relation to the ongoing contagion to Spain and Italy, make the outlook for 2012 look grim, if the situations spiral out of control in 2012.

Credit got whacked kneecapped (the joys of rebranding) and while there was some small relief in the peripheral government space, it started off with the usual flight to quality mode in the morning with German 10 year government bonds even touching 2.22% then bouncing back up to close at around 2.35%.

Here are some markets updates:
10year German Government Bond:

Greek 2 year bonds:
Creeping up again.

Vix index shooting up:

Credit Markets:
Itraxx Financial Sub 5 year CDS index reaching a new record:

Itraxx Crossover 5 year CDS, going up fast:
"In Europe, the cost of insuring corporate debt rose to the highest since June 2010. The Markit iTraxx Crossover index of credit-default swaps linked to 40 companies with mostly high-yield credit ratings increased 29 basis points to 545.5, according to JPMorgan Chase Co. at 10 a.m. in London" - source Bloomberg.

EUR/CHF, the trend is your friend and the Swiss National Bank is powerless:

Intraday volatility on the CAC40 index, you bet!

CAC40 index, that European stock index sinking feeling...

Some serious risk indices are flaring up, OIS/Libor spread and our friend TED, it is a short-term indicators of bank liquidity:

OIS/Libor spread:

We will need to monitor closely these two indicators in the coming days and weeks. Given the market is currently shut down for both Italy and Spain, their banks might need as well to curtain lending, because, like their sovereign issuer, the access to the market is as well shut down for these banks.
According to Bloomberg, the five biggest banks in each of the two countries have about 240 billion euros of debt maturing by 2013. It appears as the two graphs displayed above that the interbank market is freezing up again, as it did in 2008.
At the same thime, the average yield on high-grade corporate debentures fell
to a record 3.45 percent yesterday, according to Bank of America
Merrill Lynch index data. Investors are seeking the relative safety of corporate bonds, but we are talking about A rated companies and above, particularely high quality industrials companies in the US.

I have already discussed the issue of the wall of maturity in the following post Crowding Out. Banks and countries alike are competing to raise money. Banks will have to go to the ECB for their funding needs for the time being.

All of this means that the cost of funding will rise significantly in the years to come.

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