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Euro-zone Debt Crisis: Is It Spreading To Germany?
Germany’s failure to find buyers for 35% of its EUR 6bn 10-year bunds sparked concerns that the sovereign debt contagion may be spreading to the strongest of euro zone’s core economies
Market reaction was naturally negative for the Euro and risky assets but very positive for the US dollar and US Treasuries
Ironically, the spread of contagion to Germany could be the last straw to “force” ECB assume the role as the savior for the Euro-zone debt crisis but there is a risk that ECB only moves into the role after a credit event has occur
The European sovereign debt situation continued to dominate headlines with Germany failing to get bids for 35% of its EUR 6bn of 10-year bunds being offered on 23 November. Is Germany next?
The sovereign debt market mayhem that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain, is now threatening France and Belgium and risks spreading to Germany, the euro zone’s biggest economy and the widely regarded back-stop to the European debt crisis. German 10-year bond yield surged 22.9bps to 2.148% (the highest in nearly a month).
In addition, Bloomberg reported that Japanese investors bought US$19.9bn of U.K. gilts in 2011 through 30 September, more than any other sovereign debt and unloaded the most debt in Germany (about JPY 1.46trn), followed by sales in Italy and France as the Euro zone debt crisis continues without a resolution and risks further contagion. 10-year gilt yields is now pushed to the lowest in three months relative to German bunds and to levels not experienced in 20 years against Japanese government bonds last week. The ECB was again active in the markets buying Spanish and Italian debt to keep their respective 10Y yields from breaking above 7%.
Credit-default swaps traders are also speculating against German credit succumbing to Europe’s debt crisis. The net amount of German bonds covered by default swaps surged 40% to a record US$19.9bn in the last 12 months, according to the Depository Trust & Clearing Corp., and trading volumes are expected to overtake those on Italy for the first time soon.
Meanwhile, Belgium is experiencing increasing difficulty in its execution of the Dexia rescue plan and the Luxembourg Finance Minister Luc Frieden said that France “may have to take a larger slice of the losses.” French banks are already under huge pressure due to its significant exposure to the sovereign debt of the troubled euro-zone economies and a potentially greater burden of the Dexia losses will put significant strain on France’s heavily threatened triple A credit rating. Now all eyes will be on the Italian 6-month bill auction taking place on Friday (25 Nov).
Market Reaction Very Positive to US Treasuries and US Dollar,
But Negative For Risky Assets Like Euro, Equity and Commodities
US dollar appreciated broadly against the rest of the major currencies on Wednesday (23 Nov) and the euro was put under significant pressure as Germany, the economically strongest market within the euro zone, came under contagion risk. The EUR/USD pair plummeted lower to 1.3343 (from previous session close of 1.3505).
The US Treasury reaffirmed its status as the safest asset in the world even as German bunds faltered. The US Treasury sold US$29bn of 7-year notes at a record low yield of 1.415%, concluding a highly successful week of debt auction worth US$99bn. The 10Y UST yield dropped 5.8bps to close at 1.881% on 23 November.
In comparison, The US stock markets plunged for the sixth straight session on Wednesday as investors fled risky assets as European sovereign debt concerns spread to stronger core economies like Germany. The Dow Jones Industrial Average (DJIA) declined by 236.17 points (-2.05%) to close at 11,257.55. Meanwhile, the S&P 500 was down by 26.25 points (-2.21%) to close at 1161.79. The Nasdaq was the worst performer among the three major equity indices as it declined by 61.20 points (-2.43%) to end at 2460.08. The VIX, spiked higher to 33.98 on Wednesday from previous close of 31.97.
Crude oil prices fell as investors looked past the sharp decline in US crude inventories and concentrated on the weak economic data and the negative headlines from European debt crisis. Meanwhile gold fell below US$1,700 again on Wednesday on the back of an appreciating US dollar. Gold prices re-established it negative correlation with US dollar (USD appreciation will mean lower gold prices).
USD Funding Pressures Increase Again For European Banks – Watch This Space
The cost for European banks to fund in USD reached the highest levels since December 2008. The three-month EUR cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened to 138 basis points below the euro interbank offered rate
In addition, the TED Spread (which is the gap between 3M Libor and 3M Treasury bill yields) is an indicator of the difficulty of banks’ ability to raise short-term cash) was above 90bps since 18 November, highest since the onset of the euro-zone debt crisis in 2010 and the highest since 20 March 2009. TED is an acronym formed from T-Bill and ED, the ticker symbol for the EuroDollar futures contract.
Going Forward, Are We Heading Towards The Final Countdown For The European Debt Crisis?
The current sovereign debt situation in Europe is clearly negative on risk appetite and will continue to be supportive of safe haven asset demand. The number 1 candidate for safe haven demand would still be US Treasuries and as long as the European situation remains unresolved.
If the spread of the contagion to Germany is persistent and increasingly worsening, then the rest of Euro zone (excluding the troubled economies) will definitely deteriorate even more and much faster (i.e. France, Belgium and Netherlands). The irony is that the spread of contagion to Germany could be the trigger for Germany and the European Central Bank (ECB) to finally relent and let the ECB assume the key role of saving the Euro zone from sovereign debt crisis. The question is whether ECB will move before or after the Euro zone capitulation. We hope that it will be before, but the risk of ECB moving only after a credit event (i.e. capitulation) is a none-zero risk event now.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Euro-zone Debt Crisis: Is It Spreading To Germany?
Germany’s failure to find buyers for 35% of its EUR 6bn 10-year bunds sparked concerns that the sovereign debt contagion may be spreading to the strongest of euro zone’s core economies
Market reaction was naturally negative for the Euro and risky assets but very positive for the US dollar and US Treasuries
Ironically, the spread of contagion to Germany could be the last straw to “force” ECB assume the role as the savior for the Euro-zone debt crisis but there is a risk that ECB only moves into the role after a credit event has occur
The European sovereign debt situation continued to dominate headlines with Germany failing to get bids for 35% of its EUR 6bn of 10-year bunds being offered on 23 November. Is Germany next?
The sovereign debt market mayhem that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain, is now threatening France and Belgium and risks spreading to Germany, the euro zone’s biggest economy and the widely regarded back-stop to the European debt crisis. German 10-year bond yield surged 22.9bps to 2.148% (the highest in nearly a month).
In addition, Bloomberg reported that Japanese investors bought US$19.9bn of U.K. gilts in 2011 through 30 September, more than any other sovereign debt and unloaded the most debt in Germany (about JPY 1.46trn), followed by sales in Italy and France as the Euro zone debt crisis continues without a resolution and risks further contagion. 10-year gilt yields is now pushed to the lowest in three months relative to German bunds and to levels not experienced in 20 years against Japanese government bonds last week. The ECB was again active in the markets buying Spanish and Italian debt to keep their respective 10Y yields from breaking above 7%.
Credit-default swaps traders are also speculating against German credit succumbing to Europe’s debt crisis. The net amount of German bonds covered by default swaps surged 40% to a record US$19.9bn in the last 12 months, according to the Depository Trust & Clearing Corp., and trading volumes are expected to overtake those on Italy for the first time soon.
Meanwhile, Belgium is experiencing increasing difficulty in its execution of the Dexia rescue plan and the Luxembourg Finance Minister Luc Frieden said that France “may have to take a larger slice of the losses.” French banks are already under huge pressure due to its significant exposure to the sovereign debt of the troubled euro-zone economies and a potentially greater burden of the Dexia losses will put significant strain on France’s heavily threatened triple A credit rating. Now all eyes will be on the Italian 6-month bill auction taking place on Friday (25 Nov).
Market Reaction Very Positive to US Treasuries and US Dollar,
But Negative For Risky Assets Like Euro, Equity and Commodities
US dollar appreciated broadly against the rest of the major currencies on Wednesday (23 Nov) and the euro was put under significant pressure as Germany, the economically strongest market within the euro zone, came under contagion risk. The EUR/USD pair plummeted lower to 1.3343 (from previous session close of 1.3505).
The US Treasury reaffirmed its status as the safest asset in the world even as German bunds faltered. The US Treasury sold US$29bn of 7-year notes at a record low yield of 1.415%, concluding a highly successful week of debt auction worth US$99bn. The 10Y UST yield dropped 5.8bps to close at 1.881% on 23 November.
In comparison, The US stock markets plunged for the sixth straight session on Wednesday as investors fled risky assets as European sovereign debt concerns spread to stronger core economies like Germany. The Dow Jones Industrial Average (DJIA) declined by 236.17 points (-2.05%) to close at 11,257.55. Meanwhile, the S&P 500 was down by 26.25 points (-2.21%) to close at 1161.79. The Nasdaq was the worst performer among the three major equity indices as it declined by 61.20 points (-2.43%) to end at 2460.08. The VIX, spiked higher to 33.98 on Wednesday from previous close of 31.97.
Crude oil prices fell as investors looked past the sharp decline in US crude inventories and concentrated on the weak economic data and the negative headlines from European debt crisis. Meanwhile gold fell below US$1,700 again on Wednesday on the back of an appreciating US dollar. Gold prices re-established it negative correlation with US dollar (USD appreciation will mean lower gold prices).
USD Funding Pressures Increase Again For European Banks – Watch This Space
The cost for European banks to fund in USD reached the highest levels since December 2008. The three-month EUR cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened to 138 basis points below the euro interbank offered rate
In addition, the TED Spread (which is the gap between 3M Libor and 3M Treasury bill yields) is an indicator of the difficulty of banks’ ability to raise short-term cash) was above 90bps since 18 November, highest since the onset of the euro-zone debt crisis in 2010 and the highest since 20 March 2009. TED is an acronym formed from T-Bill and ED, the ticker symbol for the EuroDollar futures contract.
Going Forward, Are We Heading Towards The Final Countdown For The European Debt Crisis?
The current sovereign debt situation in Europe is clearly negative on risk appetite and will continue to be supportive of safe haven asset demand. The number 1 candidate for safe haven demand would still be US Treasuries and as long as the European situation remains unresolved.
If the spread of the contagion to Germany is persistent and increasingly worsening, then the rest of Euro zone (excluding the troubled economies) will definitely deteriorate even more and much faster (i.e. France, Belgium and Netherlands). The irony is that the spread of contagion to Germany could be the trigger for Germany and the European Central Bank (ECB) to finally relent and let the ECB assume the key role of saving the Euro zone from sovereign debt crisis. The question is whether ECB will move before or after the Euro zone capitulation. We hope that it will be before, but the risk of ECB moving only after a credit event (i.e. capitulation) is a none-zero risk event now.
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