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.

As Bloomberg reports:

 

„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 WSJ reports:

 

„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 Bahrain, Saudi Arabia, Morocco and Turkey – 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


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “ECB in Premature Victory Lap, Threat of Downgrades Renewed – Is the Party Over?”

  • hettygreen:

    Who do they interview for that crash confidence index anyway? Chronic worry warts? Armageddonists? Or people who read and pay attention to things? Short interest is so low so it can’t be that cohort. Could it be those who. like Joshua in War Games, have decided the only winning move is not to play? Hmm. Methinks growing ‘non-participation’ in the stock market casinos of the world is going to render useless a lot of these ‘yardsticks’ that were concocted during the heady days of the bull market.

    • I agree – this is in a way the principle of ever-changing cycles at work. Many signals that once were reliable no longer are. One must give every indicator some thought these days and try to suss out what it really means.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • rate_hike_cartoon_10.15.2015_largeJanet Yellen’s $200-Trillion Debt Problem
      Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.   “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
  • deflated-souffleThe Fed’s  Doomsday Device
      Bezzle BALTIMORE –  Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?   Only two? There were four last time!   Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...
  • Brexit supporterGold and Brexit
      Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.   August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge.   Moreover, insuring against Brexit might ironically be equivalent...
  • cameron at the EUBrexit Paranoia Creeps Into the Markets
      European Stocks Look Really Bad... Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound's volatility.   Battening down the hatches...   On the other hand, if one looks at European stocks, one could just as well argue that their bearish trend is simply continuing – and...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com