Armageddon Averted? Not So Fast.
Mario Draghi was eager yesterday to point out that the measures taken by the ECB have 'avoided an imminent credit crunch' in the euro area and pointed to the decline in various government bond yields as a measure of success.
Italy sold € 12 billion of bills yesterday, at the upper end of the target range and at a far better yield than on occasion of the last sale, seemingly underscoring Draghi's assertions.
„European Central Bank President Mario Draghi said the bank has averted a serious credit shortage and there are signs the economy is stabilizing, signaling policy makers may resist cutting interest rates further for now.
“According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. While the debt crisis poses “substantial downside risks” to the economic outlook and the ECB remains “ready to act,” Draghi gave no indication that another rate cut is imminent.
With the euro area on the brink of a second recession in three years, some signs of economic resilience have given the ECB room to assess the impact of its stimulus measures to date, which include lending a record amount of cash to banks. Draghi said those loans prevented a “serious” credit contraction. He also noted that borrowing costs for governments across the 17- nation region have dropped.“
Well, not so fast. It seems everybody has forgotten about Standard & Poors. The rating agency reminded people today that it is still around – and that a raft of downgrades of euro area sovereigns is imminent.
„The Standard & Poor's ratings agency could announce the downgrades in the credit ratings of a number of European governments as early as Friday, said two government sources familiar with the matter. One person familiar with the matter said an S&P notice is being circulated among euro-zone governments and that an announcement "could be imminent."
S&P declined to comment on the possibility of an imminent announcement on euro-zone credit ratings. In December S&P placed 15 of the 17 euro-zone countries on watch for possible downgrade, citing new systemic stresses that are pressuring the euro zone's credit standing as a whole.
Talk that S&P is on the brink of downgrading several European countries pushed the euro to a fresh session low against the dollar in Friday trading in New York. The common currency dropped as low as $1.2688, down from $1.2814 late Thursday, according to EBS via CQG. It was most recently trading at $1.2698.
The biggest question for financial markets is whether France will lose its triple-A rating after showing signs of fiscal slippage during its economic slowdown over the past year.
Any downgrade of France's rating will, indirectly, raise the cost of borrowing for the European Financial Stability Facility, whose own rating depends largely on the credit quality of the countries that back it. The EFSF, which has also been placed on negative credit watch by the S&P, would then have to pass on those higher borrowing costs to countries such as Ireland and Portugal, making it even harder for them to reduce their budget deficits as planned. „
Sounds like 'festivus interruptus'. Of course, why anyone would be surprised by this is mysterious. It hasn't been a secret that these downgrades are coming. Nor has it been a secret that once France loses its AAA rating – which seems highly likely – the EFSF will turn into a lead balloon.
Moreover, Austrian media reported a rumor that not only France, but also Austria is highly likely to lose its AAA rating tonight.
Is The Party In 'Risk Assets' Over?
The rumor about downgrades being imminent has not surprisingly cut the recent party in stocks and euro area sovereign bonds short. As it were, the stock market was ripe for a downturn anyway – all it needed was a trigger. Recently complacency has scaled fresh heights. The AAII bear percentage has fallen to a six year low for instance. A blow-out in the spread between the OEX put/call ratio and the equity put/call ratio indicates that the 'smart money' has been buying puts while the public has piled into calls. The mutual fund cash-to-assets ratio is right back at an all time low.
The spread between the OEX and equity put/call ratios is at one of its most bearish extremes in all of history (via sentimentrader.com) – click chart for better resolution.
Yesterday's sinking spell in euro area sovereign yields (ex Greece of course, the one year note yield of which exceeded 400% for the first time) has reversed today as well, although not to the extent one might have expected. However, once the downgrades actually roll in, things are apt to become more dicey again.
Stock markets are a different matter: for some time the SPX has defied the downward trend in US treasury note yields. This divergence has been a big warning sign – but there are of course questions as to the extent to which 'Operation Twist' has made this signal less reliable than it normally is. We would however warn against such rationalizations – in the markets it is generally better to take things as they are.
Yesterday the financial media made a big deal about the Yale 'crash confidence index', which shows that market participants are now more worried about a crash than at any time since 2009. This is of course a contrary indicator, or so it is held. Again, we would warn about such generalizations.
The Yale crash confidence index – people are scared of a crash when it is low, but does this necessarily mean the market will rise? No, it doesn't – click chart for better resolution.
Consider the sentiment indicators in their totality: everything points to an astonishing degree of complacency, and only the 'crash fear' indicator says people are scared of a potential crash. We think this may well make a crash more rather than less likely, as any decline that happens on account of the current complacency is bound to intensify these fears and could lead to a wave of indiscriminate selling. Moreover, whenever the financial media make a lot of noise over a specific indicator and its alleged implications, it is usually a sign that the indicator no longer works.
Credit Market Charts
Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Thursday's close.
During and after the ECB press conference, euro area CDS and bond yields generally softened further. However, as noted above, the threat of more downgrades seems apt to derail this recent happier state of affairs.
As noted before, the recent pullbacks have not yet altered the overall bullish look of CDS and bond yield charts (which by implication, is medium to long term bearish for euro area sovereign bonds and 'risk assets').
Only the recovery in euro basis swaps looks very solid at this point in time – yesterday the three month basis swaps recovered by another 10 basis points.
5 year CDS on Portugal, Italy, Greece and Spain – click chart for better resolution.
5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.
5 year CDS on Bulgaria, Croatia, Hungary and Austria – click chart for better resolution.
5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.
5 year CDS on Romania, Poland, Lithuania and Estonia – click chart for better resolution.
5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – click chart for better resolution.
Three month, one year, three year and five year euro basis swaps – another solid move – click chart for better resolution.
Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – also looking better – click chart for better resolution.
The three month euro basis swap, long term. This gives a good idea of the extent of the recent rebound in a big picture context – click chart for better resolution.
5 year CDS on two big Austrian banks, Raiffeisen and Erstebank – the latter is still subject to bad vibes from Hungary – click chart for better resolution.
10 year government bond yields of Italy, Greece, Portugal and Spain – Draghi's press conference was greeted with a big decline in bond yields across the peripheral board – click chart for better resolution.
The 9-year Irish government bond yield, the 2 year Greek note yield, and the yield on UK gilts and the Austrian 10 year government bond – we could entitle this chart 'Austria ignores Hungary' – click chart for better resolution.
5 year CDS on the debt of Australia's 'Big Four' banks – still firmly on the road to nowhere as a big triangle gets built – click chart for better resolution.
Charts by: Bloomberg
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “ECB in Premature Victory Lap, Threat of Downgrades Renewed – Is the Party Over?”
Most read in the last 20 days:
- Ganging Up on Gold
So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
- Gold Sector Correction – Where Do Things Stand?
Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit. Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India The commitments of...
- Australian property bubble on a scale like no other
Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs: Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included: the record run up in commodity prices and subsequent correction; the associated...
- Pope Francis: Traitor to Western Civilization
Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis. At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”* Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
- Bubble Dissection
The Long Term Outlook for the Asset Bubble Due to strong internals, John Hussman has given the stock market rally since the February low the benefit of the doubt for a while. Lately he has returned to issuing warnings about the market's potential to deliver a big negative surprise once it runs out of greater fools. In his weekly market missive published on Monday (entitled “Sizing Up the Bubble” - we highly recommend reading it), he presents inter alia the following eye-popping...
- A Looming Banking Crisis – Is a Perfect Storm About to Hit?
Andy Duncan Interviews Claudio Grass Andy Duncan of FinLingo.com has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove. Andy Duncan of FinLingo.com (left) and Claudio Grass of Global Gold (right) Andy Duncan: How do you see the...
- US Stock Market - a Spanking May be on its Way
Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though. Time for some old-fashioned...
- Doomed to Failure
Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years. What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out. Unfortunately, this may not be possible the way things are going. As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
- Are the Deep State’s Drones Coming for You?
What’s Aleppo? Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP DELRAY BEACH, Florida – Biggest foreign policy blunder...
- Meet Your New Stimulus Allocation Czar
March Towards Midnight The march towards midnight is both stirring and foreboding. Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom. Thoughts of imminent mortality haunt each bite. Tic-toc, tic-toc... As far as the economy’s concerned, there’s no stopping its march towards midnight. The witching hour’s rapidly approaching. We intend to savor each moment and make the best of...
- Interview with Doug Casey
Natalie Vein of BFI speaks with Doug Casey Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
- Evacuate or Die...
Escaping the Hurricane BALTIMORE – Last week, we got a peek at the End of the World. As Hurricane Matthew approached the coast of Florida, a panic set in. Gas stations ran out of fuel. Stores ran out of food. Banks ran out of cash. A satellite image of hurricane Matthew taken on October 4. He didn't look very friendly. Image via twitter.com “Evacuate or die,” we were told. Not wanting to do either, we rented a car and drove to Maryland. “We’ll just...