Sovereign Worries Once Again Touch Markets

Posted by urbandigs

Wed Apr 7th, 2010 11:07 AM

A: I say 'touch' because at this point, that is all it really is. After a 70%+ rise in equities, having a down day in today's world seems to be as much of a surprise as if the Fed would hike rates intrameeting; which we know ain't happening anytime soon! Is it me, or does it seem like markets just go up everyday? Ah, the environment where complacency sets in. Today the markets are getting a whiff of renewed Sovereign concerns over Greece. Portugal and Spain are not far behind. While it means nothing yet and with high yield still 'en fuego', it's something to watch as a potential threat to the broader market recovery. If there is one thing I learned as a trader, it is that you never know when markets will all of a sudden deem a piece of news as a 'trigger' for a new market selloff. This is what makes timing the markets so difficult as the markets can stay irrational way longer than any one investor can stay solvent!

Taking a break from Manhattan real estate today. Here is a chart showing you a 1-YR chart on 5YR Sovereign CDS spreads for Greece, Portugal and Spain - the P, G, & S in the so called PIIGS concerns (chart courtesy of my old trading buddy Anthony over at Momentum Trading Partners):

greece-spain-protugal-5yrcds.jpg

As worries rise over the ability to repay government debt, the cost of insuring those bonds rises with it - this is measured by the widening spread of Credit Default Swaps. The chart above shows you the markets worries. The spread widens as the annual amount it costs the buyer to protect against default of the insured contract rises. The spread is expressed as a percentage of the notional amount.

From FT Blog:

"Greece’s CDS spreads spiraled upwards today, providing a reminder that the sovereign’s problems are far from solved. The country’s spreads rose to 400bp, 50bp wider than Thursday’s close and the first time it has reached this key level since Feb 24. The widening appears to have been sparked by concern about bond issuance and the rate that Greece can borrow from the EU. In what appears to be yet another example of the disunity within the EU, Germany is in conflict with its fellow members over the interest rate that will be charged to Greece if it taps the emergency loan package agreed last month. According to reports, Germany is opposed to Greece being lent money at the same rate Portugal and Ireland fund, believing that Greece’s fiscal position merits a higher rate."
I repeat, we had our brush with these issues and so far they have amounted to nothing more than a case of fleas that the market ultimately brushed off. But given where we came from and how hot the high yield market has been lately, its only a matter of time until what we consider to be the same old news, is reacted to quite differently by the markets. Since most people follow the stock markets as a general indicator of economic health, rarely do they focus on the markets that may lead equities one direction or another. In late 2007, it was the ABX and Corporate Debt markets that flashed the big time warning signs, and stocks cratered after.

When a trade has been working so well for so long built upon Fed guarantees and liquidity, I always look to see what may trigger the party's end. As a HF buddy of mine likes to say, 'it works until it doesn't anymore'.


Add a comment

19 comments

CAPTCHA Image