Chart Update

Below is our customary update of credit market charts: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Friday's close.

The reaction of credit markets to the ECB announcement was in line with that seen in 'risk assets' – the good cheer continued. The big question is of course how long it will last. Let us not forget, while there was the 'unlimited bond buying'  announcement by Mario Draghi, nothing concrete has as of yet happened to alter the situation.

On the contrary, the only thing that keeps happening with unwavering regularity is that the news out of Spain and Greece continue to get worse. Slovenia's situation remains unresolved, and Italy is lying quietly in wait. The markets appear quite sanguine about both Portugal and Ireland at present, both of which seem so far both politically and economically capable of enduring the 'troika'-imposed austerity regime, but then the real problem at the moment is of course Spain.


No-one talks about Italy at the moment, but there will be a political transition there early next year that could ignite new upheaval – not to mention that the country's poor economic performance suggest an aid request will sooner or later be forthcoming.


French Bank Assets Expand

Lastly, there is France, a stalwart of the euro area's 'core'. Now that it is on the road to becoming a full-fledged socialist paradise, nothing can go wrong – or so it would seem, judging from the fact that the market displays a distinct lack of concern. However, Mr. Hollande must find at least €33 billion in savings over the next two years to bring France's deficit and debt within the limits of the 'fiscal compact', and France's banking system not only sports the biggest exposure to the 'PIIGS', but has moreover expanded its assets mightily over the past year. On the one hand we read in the press that 'France's banks race to dump assets', but on the other hand there is the reality that French bank assets have actually expanded by €839 billion over the past year (to June) alone! Obviously then the situation remains one that is pregnant with possibilities, and none of them good.

 

Still, by the end of last week, CDS spreads and bond yields collapsed across the euro area as well as in markets that correlate closely with it. So for the moment at least, happy days are here again.




5 year CDS on Portugal, Italy, Greece and Spain – click for better resolution.

 



5 year CDS on France, Belgium, Ireland and Japan – click for better resolution.




5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for better resolution.

 



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – even Slovenia enjoys a respite – click for better resolution.

 



5 year CDS on Romania, Poland, the Ukraine and Estonia – party time everywhere – click for better resolution.

 



5 year CDS on Morocco, Turkey, Saudi Arabia and Bahrain – even the sons of the desert partake in the joys spread by Super Mario – click for better resolution.

 



5 year CDS on Germany (white line) , the US (orange line) and the Markit SovX Index of CDS on 19 Western European sovereigns (yellow line) – click for better resolution.

 



Three month, one year, three year and five year euro basis swaps – the recovery continues – click for better resolution.

 



Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks -the white line (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito), compared to 5 year CDS on the senior debt of Goldman Sachs (orange), Morgan Stanley  (red), Citigroup (green) and Credit Suisse (yellow) – the solvency of banks has been magically restored! Hallelujah! – click for better resolution.

 



10 year government bond yields of Italy (bid price, generic gross yield is at 5.12%), Greece, Portugal and Spain – even long term bond yields have now joined the ECB induced decline – click for better resolution.

 



Austria's 10 year yield (green), UK gilts yield (yellow), Ireland's 9 year yield (white) and the price of the Greek 2 year note (orange – yield prior to PSI) – the 'safe havens' (Austria and the UK on this chart) are doing a little bit worse, but oddly enough, not by a whole lot – click for better resolution.

 



10 year government bond yield of Spain, weekly candlestick chart – back below the first line of trend channel support (a close look shows that there is a second, lower trend line that is still holding) – click for better resolution.

 



5 year CDS on Australia's 'Big Four' banks. Oddly enough, these seem to be sitting the 'risk on' party out a bit so far. Apprehension about China and Australia's wilting housing bubble seem to trump euro area concerns in this case – click for better resolution.

 



A long term chart of the XAU-gold ratio, via CLSA. Has it finally bottomed with the re-test of the 2008 crash low? Note that gold stocks were almost four times as expensive relative to gold back in 1996 – click for better resolution.

 



Gold, December futures contract. The yellow metal obviously loves all the recent talk about more fiscal and monetary stimulus. This has become a pretty spirited rally. We will publish a more comprehensive update on the precious metals soon – click for better resolution.

 



Total US credit market debt – where is the deleveraging? Evidently it hasn't happened yet, although this is mainly due to government and corporations amassing new debt by the truckload. Households have cut back, ex student loans that is – click for better resolution.




US labor force participation rate long term -back at the level of 1979/80 – click for better resolution.

 



Household debt to personal income ratio, US vs. Canada. At least US households have brought their debt service costs down. In Canada the credit bubble is evidently still going strong – click for better resolution.

 




Charts by: Bloomberg, Reuters, CLSA, St. Louis Fed, TFC commodity charts


 

 

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2 Responses to “Credit Markets – Benign Reaction to the ECB’s Plans, But Dire Fundamentals Remain”

  • Crysangle:

    Portugal is in difficulty . The latest cross board tax increase of 7% to compensate for an overruled attempt at withdrawing a suplementary public sector months pay has the to now cooperative Socialist party calling austerity a failure and refusing to accept any more cuts , which are suggested all the same by the PM . One reason for further measures would be that on the revenue side recent VAT increases failed to being in the additional @ 11% revenue expected , VAT revenue actually dropped @ 1% , and the deficit figure for this year is way out so far , or even if managed by some form of compensation over the rest of the year , still well outside of the target according to observers.

  • jimmyjames:

    At least US households have brought their debt service costs down. In Canada the credit bubble is evidently still going strong

    **************
    According to Canada’s FM-

    “Canada is a harbor of calm waters in a stormy sea-our banks are sound and the envy of the world”

    (this was said before the S&P downgrade) of course there hasn’t been a word uttered since-

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