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PRIOR WEEK MARKET MOVERS: EU DEATH WATCH, & WHAT LURKS BENEATH

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Part 1: Prior Week Market Movers & Their Lessons For the Coming Week

 

A trader’s strategy guide to prior week’s market movers and their lessons for the coming week for traders of all major asset classes via both traditional instruments and binary options

 

EU: Falling Credit Ratings, Rising Bond Yields & Default Risks Drive Risk Assets Lower

 

The EU remains on death watch, in terminal condition from a nasty debt overdose. There’s no one to play the lender of last resort that can supply the (temporary?)medicine, so the EU continues its tailspin, a negative feedback loop comprised of:

1. FALLING CREDIT RATINGS…

 

Portugal, Hungary, and Belgium all suffered credit downgrades. Both Fitch and S&P warned that France could expect the same if conditions continue to deteriorate. A French downgrade would threaten the credit rating of Europe’s bailout fund, the EFSF. That’s the casualty list for this week.

 

Just as a reminder, Austria, the US, and Japan are all under threat of downgrades in the coming months. See here for more details.

 

 

 

 

2…BRING RISING BOND YIELDS & DEFAULT RISKS (OR IS IT THE OPPOSITE?)

 

Probably, but no matter, one feeds the other, both a symptom of too much debt that can’t be repaid. Period.

 

With no solution on the scene, not Eurobonds, not an expanded bailout fund, and no ECB ready to be lender of last resort and buy whatever bonds are needed to keep sovereign borrowing costs affordable (this is the current favored near term solution for those seeking to defer the final reckoning), the situation continues to deteriorate.

 

As usual, too-big-rescue twins, Spain and Italy, suffered poor bond auctions and rising yields, with benchmark 10 year bonds back over the 7% red line that signals unsustainable borrowing costs. News about rising risks of credit downgrade sent French and Belgian yields rising as well. These developments were disturbing but not new.

 

What was new and was Germany’s failed bond auction and rising borrowing costs. This served as a nasty reminder that under current conditions even the safest EU debt is far from risk free. German officials tried to shrug it off as a one-off event, but the evidence suggests otherwise. Morgan Stanley had already pointed out earlier that German bund yields had already stopped falling as of early November, even though peripheral sovereign yields had continued rising. In other words, demand for German bonds as a safe haven had leveled off even while the very thing driving it, rising risk in other bonds, had continued. That suggested that those seeking safety were looking elsewhere.

 

 

Here’s the chart:

 

 

 

ScreenHunter 02 Nov 26 22 07  Prior Week Market Movers: EU Death Watch, & What Lurks Beneath

(via businessinsider.com see article here )  02 NOV 26 2207

 

Note how German 10 year yields (blue) had stopped falling over a week earlier, even while Italian and Spanish 10 year yields kept rising.

 

If indeed German yields keep rising, this auction could prove in retrospect to be the biggest event of the week, as the signal that indeed the core funding nations are fully infected. That would likely accelerate progress to some kind of near term solution at minimum. It’s likely no coincidence that fellow hard money stalwarts Holland and Finland issued comments suggestingnew openness to greater ECB intervention as a last resort.

 

 

 

Noteworthy But Not Market Moving – Yet

 

The events discussed below did not have a major impact on markets but easily could do so in the coming weeks, so it pays to be aware of them.

 

 

 

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE? 

 

 

 

 

 

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