Is the 2010 crisis over?
Posted on 22. juin, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
The MSCI World, a gauge of equities in 24 developed markets, increased 0.2 percent for an eighth straight gain, the EUR/USD increased from 1.20 to 1.24, Spanish 10 years bonds yield tightened 40 bps to 4.6%. Similarly, an index of European banks sharply rose 8% from the start of the month.
As a matter of fact, the meeting of European leaders who pledged to reduce the deficits through austerity plans while sharing the burdens of debt through systematic bonds buying program. Last but not least, the decision to publish stress tests institution by institution as of July contributed to reassure the markets.
Just like the US stress tests, no one believed in macro-economic stress tests. The default mechanism of a bank is much more endogenous and mostly provoked by financial liquidity dry up. Indeed, Nothern Rock default in September 2007 and subsequent bailout by the British Government showed that a bank financing assets resting on wholesale financing was highly vulnerable to capital markets liquidity crisis. This is exactly what happened to Spanish banks in May as they borrowed 86 Billions EUR from ECB. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank. Meanwhile, stress test is a very important path to transparency which may be a turnaround in restoring confidence. Then the critical question “is it over?” deserves to be raised.
Let’s have a look at Riskelia’s Risk Aversion radar to assess the health of the whole financial system:
As we can see, the process of return to confidence is going through equities, then emerging debt and carry trades. Nevertheless, G10 sovereign debt and the European banks remain highly vulnerable. As the global risk index is still in positive territory we still cannot remove the systemic financial alert.
What is more worrying is that another economic weakness develops into the whole system. There is an apparent Chinese weakness which has never receded since we first underlined it.
Just looking at month to date performance of a basket of risky assets (comprising equities, commodities, carry trades and credit) can help figure out the remaining financial weakness:
All markets related to China (e.g. the Shanghai composite and base metals) are strongly negative month to date despite the recent decision of China to allow a more flexible renminbi against a basket of currencies.
As always, in a global financial route, resolving an issue may become a following one more apparent. Is an industrial slowdown lead by China at play?
About us
Visit our corporate website :
Subscribe to our blog posts :