Tuesday, 9 August 2011

Markets update - Credit - Rates - Equities - The Fast and the Furious...and unintended consequences of the US downgrade.

The Fast and the Furious...

Markets update:

In the equity space, it has been volatile to say the least and given sometimes pictures are worth more than words, we'll go through some of the action today.

CAC40 intraday movement, welcome to Disneyland Magic Mountain!
Around 6.5% intraday movement.

But the German Dax index was even more volatile:

EUR/CHF - the trend is your friend and the Swiss National Bank might start printing soon, and join the debasing currency club because it must be starting to hurt exports:

In this "Risk Off" mode, Gold is continuing its uninterrupted rise, from new record to new record:

VIX index - Houston we've got a problem...

Some other risk indicators
Our friend Ted Spread is cooling off a bit:

But it isn't the case for OIS Libor spreads in Euro:

European Government Bonds update:
Shock and awe doctrine in full force on 10 year Italian and Government bonds!
Italian BTP 10 year bonds

But most of the action was on the Spanish 10 year bond!
Is it going to restore confidence in the markets? We still need long term solutions which have yet to be addressed by European politicians. The EFSF will have to be increased or spell the demise of the Euro.
Greece 2 year Government bonds - Zombie Zorba is staying put:
Since the ECB started buying Greek bonds, the 5 year Sovereign CDS for Greece went from 617 bps to 1690 bps according to Bloomberg.

In the credit is getting crushed and liquidity is extremely poor in the cash market.
CDS spreads continue to widen significantly, making everyone feeling extremely nervous. That Lehman feeling all over again...Not good.
Itraxx Crossover 5 year index, drifting wider and wider:

In the sovereign 5 year CDS space, France is widening still:

Australian Banks have also started widening in this sell-off:
Daily Focus Graph

Unintend consequences of the US dowgrade = global repricing of risk.

Since the downgrade, U.S. government bonds rallied, with
the yield on the benchmark 10-year note tumbling to an 18-month
low of 2.28 percent. Flight to what is still seen as a safe haven in this brutal environment.
S&P followed up with the downgrade of Fannie Mae and Freddie Mac, DTCC and others, and municipals bonds.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage-backed securities rose 0.14% point to 1.22% points more than 10-year U.S. government debt, according to Bloomberg. A gap of 0.87%, highest gap since April 2009.
Fannie and Freddie have so far received 170 billion USD in federal aid since being placed in conservatorship in September 2008.
AA+ has been assigned by S&P to municipal bonds, a market of 2.8 trillion USD.
The premium paid by European banks to borrow in dollars through the swap market has increased the most since January this year according to Bloomberg. The cost of converting euro-based payments into dollars as measured by the one year cross-currency basis swap fell to 43.6 bps below the euro interbank offered rate (EURIBOR) yesterday according to Bloomberg.

Banks are therefore affected the most by the US downgrade because of the implied support of the US government since 2008. Also given the economic slowdown, they are indeed more affected.

The Markit ABX index tied to subprime-mortgage bonds rated AAA when issued in 2006 fell 2.8 point to an equivalent cash price of 47. The biggest fall since May 2010 according to Markit.

Leveraged Loans, the S&P/LSTA US leveraged Loan index 100, declined by 1.77 cents to 90.66 cents on the dollar, the 11th consecutive fall and lowest level since October. The highest point was 96.48 cents to the dollar on February 14 according to Bloomberg.

Emerging Markets: The JP Morgan EMBI Global Index, mostly used benchmark for Emerging Markets bond funds jumped 34 bps to 354 bps, highest level since 2010.

Basel III is raising capital standards for banks, so quite a few banks need to raise capital. But, with the current market sell-off, the new issue market is essentially shut down, meaning down the line, it is going to be very crowded at some point when the markets cool-off and opens up again. Given countries, banks and others will be coming hard to the market to raise capital, it is going to cost more. Simple as that.

Companies are still hoarding cash and sitting on a hefty pile of 963.8 billion USD in the US according to S&P data. Companies are in great shape to weather the storm. They have paid down debt and are to some extent quite lean with healthy balance sheets.

Finally, unintended consequences on China - Bloomberg:
The Yuan and the Dollar index

Charts of the day - Bloomberg:
Portuguese citizens like Irish citizens, are leaving their countries for a new life, leaving behind their battered and bruised economy:
Migration might fall in negative territory in Portugal unless the government can end the exodus of workers seeking employment abroad. But it isn't only happening in Portugal, it is also happening in Greece and in Ireland.

And as a conclusion, Bank of America's market cap as of yesterday's close was 73 billion dollars, Apple has enough cash to buy it outright in cash with 76 billion USD in the bank account...
Bad news keep piling up for Bank of America since the very ill-fated acquisition of Countrywide...

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