The dead cat bounce before a crash in August?
Posted on 09. juil, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
In the last two days, risky asset classes have rebounded sharply from their lows following the release of the European stress tests methodologies. The latter will assume a loss of 17% (relative to face value) on Greek bonds and 3% on Spanish Bonds. From January 2010, total return performances have been -16.5% on Greek Bonds and -2.5% on Spanish Bonds. These are not stress tests, they just match actual prices! Nevertheless, the news trigger a coordinated rally across Oil, Equities, carry trades, credit indices.
Is the crisis over? No, it is not as risk aversion remains elevated across the board on essential links of the financial system network: the high level of risk of the G10 sovereign and the EUR banks debts. Actually, Greek yields have gone above 10% in the last few days without any respite. This high risk premium is revealing of the level of political uncertainty surrounding the feasibility of the European bailout plan.
Is the economic situation better? Nothing has changed in the US and in China regarding the current slowdown in the industrial outlook. We could say that the Eurozone economic outlook is even worse with a EUR/USD rate at 1.27 than 1.20 as reducing the public deficit with a private sector that cannot take more debt requires reducing the current account deficit which seems a remote scenario with such a currency rate.
Riskelia’s global trend indicator on risky asset classes has moved on negative territory. It did so on three occasions in the past 10 years: before September 2001, in June 2002 and in August 2007. In every instance, the financial system went through a major turmoil in the subsequent months.
We can therefore predict more financial problems and a severe financial crash when the markets realize that the banks’ stress tests are faked.
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