Tag Archives: Basis point

European Credit Market: Close To Panic (Update)

While investors in the European credit market more or less capitulated last week, the situation is now more like a total panic. ECB President Jean-Claude Trichet says that the risk to the financial system is as high as it possible can be, putting the mark in RED zone on the new colorized risk meter.

“This did little to boost confidence in a market that already had concerns over the Greek government’s ability to get its austerity measures through parliament.”

Gavan Nolan

The Markit iTraxx SovX Western Europe breached the level  of 240 basis points for only the second time on record. Greek spreads blew up 213 bp’s, to 2100. Portugal gained 50 and are now trading at at record wide levels – 825 points. Other peripherals also widened sharply.

Contagion watchers will have been concerned by the significant moves in Spain (305bp, +22) and Italy (200bp, +20).

The latter sovereign went above 200 basis points  for the first time since January.

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After ECB president Jean-Claude Trichet said that the risk to the financial system is as high as its gets. Trichet also said that the newly created European Systemic Risk Board was planning a “risk dashboard” with a color-coded warning system. And when asked what the current color would be, he answered; “on a personal basis, I would say it is red”.

“Unsurprisingly, this did little to boost confidence in a market that already had concerns over the Greek government’s ability to get its austerity measures through parliament. The conservative opposition declared that it would vote against the bill. This was to be expected and was consistent with its recent position. But there are signs that members of the ruling socialist PASOK party could also vote against the bill, placing its passage in doubt. Even if the government gets the measures through parliament it faces a considerable challenge in implementing them,” analyst Gavan Nolan at Markit Credit Research writes in today’s Intraday Alert.

Adding: “Talk of a “black hole” in the austerity plans added to negative sentiment.”

But the peripherals didn’t have just Greece to contend with, Nolan continues.

“The markets were already in a bearish mood after Ben Bernanke’s cheerless assessment of the US economy, and yet more disappointing economic data was unlikely to be shrugged off. So it proved with the release of Markit PMIs this morning.”

Recession Is Back?

Overnight the Markit/HSBC Flash China Manufacturing PMI came in at 50,1 –  a significant drop from the previous month,  and an 11-month low.

“A hard landing for the Chinese economy is one of the main fears of investors, and sentiment hasn’t been helped by the Sino-Forest scandal,” Gavan Nolan explain.

Growth momentum also appears to be slowing in the euro zone.

The Markit Flash Euro zone PMI fell to 53.6 in June, the lowest level since October 2009.

The core-periphery dichotomy is still evident, but worryingly the rate of growth in German manufacturing slowed sharply.

Output in the euro zone, excluding Germany and France, contracted for the first time since September 2009.

The data underlined just how difficult it will be for the peripheral countries to reduce their debt burdens through growth.

Volatility in the commodity world added to the tension.

Brent crude was down by over $6 a barrel to $107 after the International Energy Agency announced that its members were releasing 60 million barrels of oil from their emergency stocks.

Glencore – 302 bp’s, +36 – the world’s biggest commodity trader was the day’s worst corporate performer.

Here are copies of the latest Markit PMI survey:

Markit Economic Research: Eurozone PMI. 23062011.

Markit Economic Research: PMI and CBI surveys compared. 23062011.

Markit Economic Research: HSBC Flash China Manufacturing PMI. 23062011.

Markit Economic Research. China PMI Flash Comment. 23062011.

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The Risky Are Rallying

Well, why not? The EU leaders are not going to solve anything this time either. That means the central banks have to keep on buying government bonds to keep the prize stable and prevent a total collapse. Seems like a pretty safe bet to me…so far…

“If the EU does opt to muddle – let’s “wait and see” – through then it will no doubt fall on the ECB to provide support.”

Gavan Nolan


Not even the collapse of a euro zone government could prevent risky assets rallying today, with stocks reaching their highest levels for two weeks. As expected, Portugal’s minority Socialist government lost the vote on its latest austerity package, prompting the prime minister Jose Socrates to resign. The incumbent government will continue in a caretaker capacity until the president calls a general election, which will probably be held within the next two months. This complicates matters even more for the EU and Portugal, according to Markit Financial Information.

The latter country’s yields were up around 7.75% (Markit Evaluated Bonds) earlier today, a level that is clearly unsustainable over the medium-term.

Pressure was already mounting on Portugal to accept a bailout, and this will only increase over the coming days and weeks. But the power vacuum makes a rescue problematic.

“If the country is to receive loans from the EFSF it will need to agree to another round of austerity measures. The caretaker government doesn’t have the mandate to do this. Portugal might have to wait until the new government is elected in May,” credit analyst Gavn Nolan writes in the Intraday Alert from Markit.

But it faces a large bond redemption in April:

“Investors will be looking at a country that is politically unstable with low growth prospects; high yields will be required to stimulate demand for the debt. If the EU does opt to muddle – let’s “wait and see” – through then it will no doubt fall on the ECB to provide support.”

There were rumours today that the central banks was active in buying bonds. Hovever, some traders said there was no substance to this.

“The sanguine view taken by the markets – the sovereign’s CDS spreads ended the day flat – implies that a bailout is all but inevitable. A rumour that a rescue was impending helped spreads recover from earlier widening. The markets will be looking for at least a message from the EU summit that the EFSF is available to Portugal,” Nolan underlines.

Investors have become prepared for disappointment from the summit.

“This isn’t an unfamiliar feeling for the markets where EU gatherings are concerned. It is not even certain that the debt crisis will be the main topic of discussion; Libya and the fate of nuclear power could occupy much of their time.”

Two of the main concerns of financial markets – the funding of the EFSF and Ireland’s bailout terms – are highly unlikely to be resolved at this summit.

The first issue is expected to be addressed once domestic political hurdles are overcome in Finland and Germany.

“But the latter issue will probably be more challenging. Ireland’s intransigence on its corporate tax rate is clearly bothering some of the other members, but the elephant in the room is the recapitalisation costs of the Irish banking sector,” Gavan Nolan points out.

Adding: “If a figure in excess of EUR35 billion is revealed in the stress tests results at the end of this month, then the country’s solvency will come under intense scrutiny. Burden sharing by senior bank bondholders – anathema to the EU’s powerbrokers – will be back on the agenda.”


The great and the good at the EU will take some comfort from the absence of contagion in the sovereign credit markets.

Spain’s spreads would have been widening sharply a few months ago if Portugal was under similar pressure as it is today.

“But the larger Iberian country is no longer seen as a credible candidate for a bailout by most market participants, evident in the difference between the two sovereigns’ spreads, now at a record high,” Nolan concludes.

  • Markit iTraxx Europe S15 101bp (-3), Markit iTraxx Crossover S15 381bp (-5.5)
  • Markit iTraxx SovX Western Europe S5 171bp (-3.5)
  • Markit iTraxx Senior Financials S15 145bp (-3.5), Markit iTraxx Subordinated Financials S15 258bp (-6)
  • Sovereigns – Greece 965bp (0), Spain 222bp (+3), Portugal 530bp (+1), Italy 158bp (-2), Ireland 605bp (-3)
  • Saudi Arabia 126bp (-1), Bahrain 332bp (-7)
  • Japan 101bp (-1)
  • Tokyo Electric Power Co – 275bp (+10)

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A Market Meltdown

Financial markets are beholden to the Japanese nuclear situation, and the twists and turns of the story are causing volatility in every corner of the financial market. In fact, if we are facing a nuclear meltdown in Japan, we’re also facing a financial meltdown. Investors woke up this morning to find that the Japanese authorities were still struggling to cool the overheating reactors. Japan’s sovereign CDS was 16 basis points wider at 120, (about the same level as Italy and Saudi Arabia), while the Markit iTraxx Japan was trading around 150 basis points , 15 bp’s wider than yesterday’s close.

“Some market participants were treating the news with caution but not enough to stop spreads rallying in the afternoon.”

Gavan Nolan


After yesterday’s aborted attempt to use military helicopters to drop water on the reactors, the radiation levels were still way too high today, and the Japanese rescue workers had another go at it. But reports suggests, however, that much of the water missed its targets and the radiation levels were rather rising than falling as the efforts to douse the reactors with high-pressure hoses ultimate proved to be ineffective.

Tokyo Electric Power Co (Tepco), the operator of the nuclear plants, saw its spreads widen by nearly 100 bp’s to 390, Thursday.

The seeming lack of progress concerned investors, and I guess it was no surprise to see Japan’s CDS spread spiral upwards.

The chart above shows the recent volatility, reflecting the uncertainty over the eventual costs of the disaster.

I wrote in a post yesterday that Tepco was about to build a new power cable to supply electricity enough to cool down the reactors.

(See: Nuclear Holocaust: All We Need Is A Solar Storm (Or A Crazy Hacker)

Well, I must admit I halted for a second when I read the news report saying that the company was trying to fix the original one, that apparently has been broke for some time… and that didn’t ease the volatility.

Tepco said they would fix the cables that supply electricity to the reactors cooling systems by the end of the day. We’re still waiting for that confirmation.

But according to Gavan Nolan at Markit it “acted as a boon to risky assets across the globe.”

“Some market participants were treating the news with caution but not enough to stop spreads rallying in the afternoon,” he adds.

And Nolan deserves some credit for doing his best to cheer us up, pointing to US Philly FED Index, released today:

“More concrete news came in the form of the Philly Fed index, which posted its strongest reading since January 1984. The index came in at 43.4 in March, up from 35.9 the previous month and confounding expectations of a small decrease,” he concludes his daily summary.

  • Markit iTraxx Europe 101.5bp (-3.5), Markit iTraxx Crossover 403bp (-7.5)
  • Markit iTraxx SovX Western Europe 168bp (-7)
  • Markit iTraxx Senior Financials 152.75bp (-5.75), Markit iTraxx Subordinated Financials 269bp (-9)
  • Sovereigns – Greece 965bp (-19), Spain 220bp (-7), Portugal 503bp (-11), Italy 157bp (-5), Ireland 580bp (-8), Belgium 144bp (-6))
  • Saudi Arabia 130bp (-4), Bahrain 348bp (-6)
  • Japan 110bp (+6)
  • Markit iTraxx Japan 140bp (+5)
  • Tokyo Electric Power Co – 345bp (+50)
  • Markit Bonds – Japan 1.9 Mar 21 106.39 (106.30 yesterday)

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