Black Swan Insights

Showing posts with label EU. Show all posts

Irish 5 Yr CDS On The Rise

Is there something brewing in Euro CDS land? While equity markets remained quite during another summer day, there were some interesting movements in European sovereign CDS with notable widening in Italian and Irish 5 Yr CDS. There has been no news that would account for the unusual movements so they are worth keeping an eye on. Of course if you are country like Italy with a debt to GDP ratio of 115%, it is just a matter of time before it all comes crashing down. Ireland too is in trouble and is one failed bond auction away from ending up like Greece.

Entity Name       5 Yr      Mid Change (%)       Change (bps)       CPD (%)

Italy                 197.67         +9.66                          +17.41               15.75

Ireland             303.23         +6.80                          +19.30               22.80

Germany           47.34         +5.36                             +2.41                 4.04

Greece           847.95          +3.51                          +28.79                51.00

Source: CMA Datavision

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European Banks Faced Funding Problems ECB Bank Lending Survey Says

The ECB released their July Bank Lending Survey which asked banks about lending conditions in Europe and whether the banks are facing any troubles funding their operations. This is a quarterly survey by the ECB and was conducted between June 14th and July 12th, so it was taken before the completion of the European bank stress tests. But it gives you an indication of the problems European banks were having securing funding. The real problem was in the wholesale funding market and short term money markets. The banks seemed to have learned nothing from the Northern Rock and Lehman Brother's failures. Both institutions relied heavily on wholesale funding and watched it dry up in a matter of days. But who needs financial prudence when you have the ECB. Here is an excerpt from the survey:

For the second quarter of 2010, possibly reflecting the renewed financial market tensions following concerns about sovereign risk, banks generally reported a deterioration in their access to wholesale funding across all segments, but more intensely as regards access to short-term money markets and the markets for debt securities issuance. On balance, in the second quarter of 2010 around 30-40% of the banks surveyed (excluding those banks that replied “not applicable”) reported deteriorated access to money markets and around 40-50% of the banks reported deteriorated access to debt securities markets. In addition, true-sale securitisation of corporate loans and loans for house purchase also became somewhat more difficult in the second quarter of 2010. On balance, between 20% and 30% of the banks for which this business is relevant (around 60% of the sample group) reported deteriorated access to securitisation of respectively corporate loans and mortgage loans. Moreover, according to 37% of the banks for which this business is relevant (which is the case for 40% of the sample group), synthetic securitisation, i.e. the ability to transfer credit risk off balance sheet, deteriorated.

It is unclear whether credit conditions have improved very much since the bank stress tests. While bank CDS spreads have tightened, Eurlibor has steadily risen which gives you a mixed message. The real problem for the European banks is their dependence on wholesale funding as opposed to more stable funding sources such as bank deposits.

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Thoughts From Marc Faber--- Aug 1

Legendary investor Marc Faber is out with his monthly report which discusses the US economy, QE 2, equity markets, China's property sector, and the EU debt crisis. Here are a few highlights:

1. Stock market outlook is uncertain. Faber is less confident that markets will fall to 850-900 because of the inevitable money printing (aka QE 2), which will boost asset prices. Possible trading range developing with 1040 as the bottom and 1170 as the top for the S&P 500. Even so he would be reducing equity exposure on any stock market strength.

2. Euro is likely to bounce around erratically between 1.25 and 1.35. Faber hates the dollar and euro but likes undervalued Asian currencies.

3. If you have to buy stocks make it Asian equities and REIT's in Thailand, Singapore, and Malaysia. They have high yields and are attractive compared to 3% 10 year treasuries. Asian economies will continue to grow at a healthy clip even with weakness in the US and Europe, which makes them good investments.

4. China's economy will continue to do grow even if the property market declines sharply. The growing Chinese middle class will support increased domestic consumption. Wages in China have gone up giving hundreds of millions of people increased purchasing power.

5. US municipal debt will likely become a major problem in the future. As of the 1st quarter of 2010 there is an estimated $2.8 trillion in outstanding municipal debt, which can never be repaid and will require a federal bailout. Another issue is state and local government pension plans, which are severely underfunded.

6. Gold is a buy after its seasonal bottom usually in September. Long term trend is up and as long as Bernanke is Fed Chairman, gold will do well.

7. Likes agricultural commodities and related stocks (but says avoid commodity ETF's because of the roll). In particular Faber likes wheat, rice, and soybeans. He also likes the fertilizer and seed stocks.

8. Faber expects rising agricultural prices will lead to civil unrest and violence in some countries.

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