Tuesday, November 29, 2011

Credit Not Confirming the Equity Rally

Yesterday was a big day for equity markets, and today I did a quick check to see how some of the European credit metrics were behaving. From what I've seen, the credit markets have not confirmed the equity bounce. Below are a few charts we're watching, along with our interpretation. 

ECB Eurozone Liquidity Recourse to the Deposit Facility is rising fast again. This implies that banks are afraid to lend, and would rather just park funds at ECB. 

Euribor OIS is elevated. This chart is watched as a barometer for interbank lending in Europe, and high and rising levels say that bank lending to other banks remains in a stressed state. This metric confirms the message coming from the prior chart. 

Credit Default Swap (CDS) pricing on European Sovereign debt is still surging. This suggests that the cost to insure against European Government default is rising rapidly.

CDS for European Banks are surging up in price. Unicredit SpA(Blue line) is one of Italy’s largest banks. This chart shows that the markets are pricing default risk into European banks at an alarming rate, and many now cost more to insure than they did during the great credit crises of 2008/2009.

The Ted spread is used as a measure of confidence in the financial and banking system, and it is moving up in tandem with the other measures I mentioned. This is not a good sign for the health of the banking system.

There are more charts, but you get the point. Equities had a big day yesterday, but credit markets have not confirmed the latest equity market rally.