Posts Tagged ‘Risk’

Risk Makes a Comeback

June 14th, 2010 Michael McDonough Comments off

Investors are feeling more at ease with the uncertainty facing global market.  The AUD/JPY exchange rate—a popular FX carry trade and risk metric—has moved off of its recent lows of less than 74 to a level of 79.4.  At the same time, 3M LIBOR halted its climb, and has remained fairly steady around 0.54%, albeit still more than double early March levels.  Investors growing appetite for risk partially stems from a successful Spanish three year government bond auction last week, which received a surprisingly strong bid to cover of 2.1, while still yielding an elevated 3.3%–compared to less than 2% for bonds of a similar duration in March.  Spain is scheduled to reopen EUR3.5bn of 10Y and 30Y bonds on June 17th.  With a relatively quiet week on the data front—barring the auctions in Spain and a European summit on Thursday—traders will likely continue adding on risk, pushing European spreads down; US Treasury yields up, all boding well for growth correlated assets, including equities.   

Source: Bloomberg

Categories: Europe, US Tags: , , , ,

Risk Returns with a Vengeance

May 25th, 2010 Michael McDonough Comments off

After stabilizing from 5/20 to 5/24 AUDJPY’s decline has returned with a vengeance falling to 72.88 from 74.63 a day prior.  The currency pairs stability over the last few days led some to believe the market could be approaching a bottom.  Other notable risk indicators moving this morning include the TED spread, now up to 38.6bps (from 18.6 at the beginning of the month), and US breakeven rates.   1Y breakeven rates fell below zero this morning, with rates on the long end of the curve beginning to see more significant declines.    Investors in Europe continue to flock to the safety of Germany with German 10Y yields reaching a record low 2.56%.  Other than a quick peaceful resolution to the geopolitical risks building in the Korean peninsula, there doesn’t appear to be any near-term positive catalysts in the pipeline to shift investors sentiment.    

Categories: Europe, US Tags:

Risk Aversion the New Norm

May 21st, 2010 Michael McDonough Comments off

Global markets may be converging on a new ‘volatile’ norm as investors revalue risk, as governments begin the painful process of deleveraging to more sustainable debt levels.  Thus far fears of sovereign defaults have remained contained to the usual suspects—fundamentally weak nations—leading investors to flock to the safe-havens of the U.S., Japan, and Germany.  Risk aversion has pushed 10Y German Bund yields down to a multi-decade low of 2.632%; while 10Y U.S. Treasuries are yielding 3.113% from nearly 4% in April.  Yet, safe-haven debt levels are in most cases worse than their weak counterparts, especially in the case of Japan, meaning deleveraging is a unilateral prescription.  I won’t beat a dead horse on who could be the next Greece, but I do want to emphasize that deleveraging is a painful process, which can adversely impact growth.  Eventually, in the U.S. tough austerity measures coupled with substantial tax increments will be necessary, transforming the fuel of the nascent economic recovery, fiscal stimulus, into fiscal drag.  Japan’s likely the most at risk of the safe-havens with a vast amount of its debt financed domestically, by what is now a shrinking and ageing population; meaning external financing will ultimately be necessary.  This could cause investors to reassess Japan’s stability.  The good news is while tough measures in the US are necessary— creating significant economic headwinds— it should allow the nation to avoid the fate of Greece.  Meanwhile, I recommend monitoring investor sentiment toward Japan as the canary in the coal mine for the U.S.

Categories: Asia/China, Europe, US Tags: , , ,

Political Risk Wearing on Investors

May 20th, 2010 Michael McDonough Comments off

Political risk, typically a relative constant in trading, has investors running for the doors this morning as concerns grow around Germany’s real intentions behind its short-selling ban, along with what regulations might come next.  Uncertainty is being compounded by the financial overhaul debate taking place currently in DC.  One comment that especially caught traders’ attentions yesterday came from Michael Novogratz, president of Fortress Investment Group, who said on CNBC, “The market is de-risking itself.”  He also said, “When you want to get short there are a lot of weapons you can sell.”  Glenn Dubin of Highbridge Capital added, “The sovereign debt crisis hit a wall and all bets are off,” telling CNBC. “We’re seeing massive de-risking.”

Risk indicators seem to confirm Novogratz’s and Dubin’s views showing no signs of easing this morning.  LIBOR has continued to climb reaching levels not seen since last summer.  At the same time AUDJPY, a popular carry trade and risk proxy, has plummeted.  Until confidence returns to the market investors will continue curbing risk, and as of right now no clear short-term catalyst can be seen in the pipeline. 

Categories: Europe, US Tags:

TED Spread Begins to Spike: Counterparty Risk Rises

May 7th, 2010 Michael McDonough Comments off

Fear is beginning to seep into the European financial system with LIBOR rates edging up; leading to a sharp rise in the three month TED Spread (tracking 3M LIBOR against 3M US Treasuries). While nowhere near its crisis high of over 450bps, the TED Spread has enlarged to 32bps from just 19bps on May 3rd. It is now blatantly apparent, following downgrades of both Portugal and Spain and global asset sell-offs, that the crisis in the Hellenic Republic is not just a domestic or regional issue, but a global one. While the current jump pales in comparison to the spike seen during the collapse of Lehman in 2008, the TED Spread has reached levels not seen since the middle of 2009—while it was still coming off the spike caused by Lehman.

Today’s employment news from the U.S. may help to alleviate some pressure on the markets, but job gains in the U.S. will likely moderate as the year progresses as the economic recovery becomes more tepid. Additionally, we have hardly seen the end of the situation in Europe, with Portugal, Spain, and Italy next on the chopping block if the situation worsens. Yesterday, Spain’s 5Y note auction received the highest yield for the country since 2008, showing liquidity may be drying up for the nation. The situation is worse in Portugal where the country’s yield curve has begun to mirror that of Greece’s leading up to the onset of its domestic crisis.

As the chart below illustrates, for the first time this year, the TED Spread has begun to trade in correlation with the VIX, indicating fear has spread from the equities market into the intra-bank lending market, which could have significant repercussions.

Source: Bloomberg

Categories: Europe, US Tags: , , ,

PIIGS: Europe’s ‘Sub-Prime Borrowers’

May 5th, 2010 Michael McDonough Comments off

As the crisis in Europe continues to spiral out of control, I wanted to take a look at the cost of insuring against default for the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). As you can see from the chart below, over the past several weeks 5Y CDS for the PIIGS has risen substantially, with the biggest gains coming from the epicenter of the crisis—Greece.  Downgrades for both Portugal and Spain with the specter of more to come, have combined with deadly protests in Greece, widening spreads for  the PIIGS government bonds over Germany–the European benchmark rate–to record levels.  I expect volatility will continue as the situation escalates, with Portugal and Italy being most susceptible to increasingly worried investors, and ratings agencies still under significant scrutiny following the US subprime disaster.  Over the short-term, the result of a Spanish 5Y note auction  tomorrow should help measure investor sentiment;  a successful auction could help stymie, at least for the time being, fears of contagion.

5Y USD CDS for the PIIGS

Source: Bloomberg

Categories: Europe Tags: , , , , ,