Monday, 8 August 2011

Markets update: Shock and awe...

"Shock and awe (technically known as rapid dominance) is a military doctrine based on the use of overwhelming power, dominant battlefield awareness, dominant maneuvers, and spectacular displays of force to paralyze an adversary's perception of the battlefield and destroy its will to fight."

The ECB stepped in today to buy some 10 year Spanish and Italian bonds, hence a quick rally of 88bps and 80 bps, respectively.

Much a do about nothing, given the ongoing German position refusing to increase the EFSF mechanism. Are we seeing a German capitulation which would accelerate the demise of the European currency as we know it?

Things have definitely taken a turn for the worst.
The ongoing equities sell-off accross the world has been accelerated by the spillover from the US dowgrade, with S&P, slicing through the ratings of Fannie Mae and Freddie Mac, as well as DTCC and others. Next on the dowgrade line are US financials, hence the sell off in banking stocks, as well as a serious widening in their 5 year CDS spreads:
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Bank of America and Morgan Stanley, currently leading the widening pack.

In relation to my post on the US AAA dowgrade, the impact on Treasuries is limited, in fact they are still playing their role of safe havens in this havoc, given today tightening move we have seen today in the UST space. The US 5 year Sovereign CDS, is still standing at around 52 bps, much tighter than the European Sovereigns for instance and the probability of default, is not high.

Today France 5 year Sovereign CDS was wider by 18 bps to 158 bps according to CDS data provider CMA, the cumulated probability of default is now at 13.20%.

One thing for certain, it was sanguine today.

To be continued...

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