Global Financial Systemic Risk Is Rising - Again

Tyler Durden's picture

Credit markets in Europe remain significant underperformers relative to equities this week, despite some short-covering yesterday that narrowed the gap. Global Financial Systemic Risk is rising again - dramatically. It seemed that the dramatic shift from early to mid-week was enough to scare some action back into the market and we can't help but feel that the rallies in Spanish and Italian govvies (on what was very likely thin trading) was all central banks, all the time. Today saw stocks rally in Europe to new post-NFP highs while credit leaked wider off its open and closed on a weak tone into the US long-weekend.


As BNP pointed out this week, the 7 day run wider in European financial credit was one of the largest on record at around 57bps (versus 64bps record) and so some pullback from that run was likely but the lack of follow-through today suggests this was books getting flatter into a decision/headline-heavy weekend as opposed to significant rerisking. EURUSD trod water around 1.3125/50 but AUD weakness spurred a much more risk-off attitude in FX that was not evident in stocks (yet). Treasuries were inching lower in yield as we moved into the European close after extending yesterday losses earlier on (up 2-6bps on the week). European sovereigns ended mixed with most wider since the NFP-pring Friday (Spain +27bps spread to bunds) while Italy managed to recover (-11bps) and Portugal is notably tighter. This week saw very sideways action dominated by the sell-off and rally reversal in Spain and Italy's pivot securities. As Europe closes, commodities (ex-Oil) are selling off rapidly with Copper the week's big loser -4%, Silver next - underperforming USD strength, and Gold just in the red on the week at $1720.  

The end of the week felt much more like covering to flat than any aggressive re- or de-risking which seems appropriate given the rising risk of binary events and an inability to hedge those jumps.


Our index of the 30 most systemically important global financials (as per the FSB) is rising fast again as European/Greek concerns rise. Having retraced to the peak levels from mid 2010, we have rapidly risen in the last week - even as stocks have rallied.

Aside from the huge reversal day in Thursday - the week was weak in credit and strong in stocks (again). Today was flat in credit and up in stocks.

US and European financial credit markets have been weak as contagion risk and systemic risk rises. Europe's bounce yesterday was notable but saw no follow-through today and after an almost record seven-day run of around 57bps in European financials, it is perhaps no surprise we saw some covering or squaring of positions. Basis traders have been busy also (buying CDS protection and buying bonds) to lock in this difference, which has supported cash markets, but does little to help overall risk tolerance.



The other notable change here is that the index rally of the last day or two was not at all seen in underlying name CDS (the skew has widened massively) - i.e. while the index value improved, the value of the portfolio it is based on in fact weakened - which suggests a rotation from index overlays (quick liquid hedge) to more idiosyncratic (LTRO? Greek-exposed?) hedges. From Wednesday's close with the index and intrinsics at 242, the index has rallied to 222bps while intrinsics has weakened to 248bps!

Away from credit and equity, FX, rate, and commodity markets were choppy with the latter the most risk-averse this week - with Oil the obvious exception (up over 4% at around $103).


It would seem that amid all the noise, there was some signal - commodities, FX carry, and Credit were not happy while Stocks seemed more noise and headline-driven (as did EUR specifically) and with Global Financial Systemic Risk rising again - we suspect that government intervention will remain the only thing to hold this back.


Charts: Bloomberg

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true brain's picture

My shorts can't wait anymore. crash already motherfucker.

WestVillageIdiot's picture

Leaving a job finally broke me of my market (and shorting) addiction.  I sleep so much better now.  One more good reason to leave a job I hated (mostly the people and the B.S. that went with them). 

spiral_eyes's picture

The system is the problem. It can't be fixed no matter how much liquidity they choose to pump. It needs to fail, and then be rebuilt from the ground up. based on equity, not debt.


dizzyfingers's picture


Goldman Sachs Code-Theft Conviction Reversed (then amended) The 2nd U.S. Circuit Court of Appeals heard his appeal on Thursday, and hours later and without explanation, reversed the 2010 conviction and ordered him acquitted, which usually forbids a retrial. On Friday, however, the court issued an amended order. It reversed the conviction, and ordered him free on $750,000 bond but removed the acquittal language. The appeals court said it would issue an opinion explaining the order in “due course.” (.pdf)The New York Times summed up the court’s concerns during Thursday’s oral arguments. The paper noted that a critical issue was whether what he did was actually a crime under the Economic Espionage Act, which requires the theft to be from a “product designed for interstate commerce.” Aleynikov’s lawyers took the position that the software wasn’t used in interstate commerce, while the feds argued that it clearly was.Aleynikov, a naturalized U.S. citizen who emigrated from the disintegrating Soviet Union in 1991, earned nearly $400,000 a year as a vice president with Goldman Sachs. He was arrested in July 2009 at the Newark Airport in New Jersey as he returned from a trip to Chicago.Authorities alleged he stole “hundreds of thousands of lines” of source code from Goldman Sachs in the days before he left the company. They alleged that he downloaded various software from the Goldman Sachs network and transferred it to a storage website hosted in Germany, before trying to erase his tracks from Goldman Sachs’ network.Aleynikov allegedly used a script to copy, compress, encrypt and rename files, and then upload them to the server in Germany. Once the data was transferred, the program that was used to encrypt the files was erased, and he allegedly attempted to delete the network’s batch history showing his activity. Prosecutors said Aleynikov made several copies of the code and had it on his laptop when he flew to Chicago to meet his new employers at Teza Technologies in Chicago. Prosecutors said a search of Teza computers uncovered no copies of Goldman Sachs’ source code.



Chief KnocAHoma's picture

Big deal... so the World financial system is melting. At least Obama is forcing those wicked believers in Christ to take their damn birth control pills and eat them along with their peas.

Don't worry Huessein is on top of it!


WestVillageIdiot's picture

Every time I look at O, and his followers, I become a bigger believer in birth control. 

I have never once gone into the NYC subway system and thought, "man, we need fewer abortions".  Sad but true. 

Precious's picture

Your mistake is going into the NYC subway system.  

true brain's picture

good thing you haven't been to Kenya.

apberusdisvet's picture

Beg, borrow, or steal to get your hands on physical PMs, folks.

The status quo of delusion, corruption, and incompetence is about to be bitch slapped.

Vince Clortho's picture

Release another rumor, print more money, and add some zeros to all the central banks digital reserves.  Another problem solved.

WestVillageIdiot's picture

How many times have you worried about missing a party, or a big game, the thought just driving you crazy?  Humans want to be involved.  They want to be a part of something, to show that they are as good as everybody else.  The same is true of rallies.  They have a way of dragging you in, just like that party that is most likely going to be shitty but you still want to go anyway.

People just couldn't bring themselves to jump out of the stock market in 2007 and 2008.  After all, it was going up.  If it kept going up, "I would miss it" and then you would look stupid to friends and family.  The "subprime crisis" hit.  Bear Stearns hit.  The housing slump hit.  But yet the market just kept going.  It seemed like stocks could overcome the obstacles. 

Let us fast forward to 2012.  We have turned a financial problem into a monetary plague.  Greece is a disaster.  Portugal, Spain, Ireland, The UK, The U.S. (with deficits that are stated to be 10 percent of GDP), oil is at $103 (WTI), and still AAPL and the market keep going higher.  And the fear is to jump out and miss out on all of that "yield" in this ZIRP infested world. 

Time and again we put ourselves in these situations because that is what humans do.  We just can't, or won't, imagine the alternative outcome.  So we stay in the crowd.  If the market crashes I was in it with everybody else.  If I jump out, and it keeps going up, then I missed it alone.  As so many ZHers know, being right by yourself is probably more painful than being wrong in the herd.  At least it feels that way sometimes. 

All of this freezes the regular guy into inaction.  I think that is where we are at now.  The illusionists seem to have the Statue of Liberty hanging in midair and most people believe in the illusionists. 

taniquetil's picture

It's all priced in already. Bullish.

XitSam's picture

Dodd-Frank took care of the systemic risk problem.  /sarc

Precious's picture

What's beautiful about markets is that one can trade either direction.  With this obviously present QE funded bubble, it would be nice to hear from ZH about making money when the bubble in these equities POPs.

When a company like Brightcove goes public and surges, you know it's a bubble.   SFDC at 130?  Bubble.  All of these volatile examples are frothy.  Microsoft breaking out. What times.  

Make money going down.  It's even faster.  Now, how to do that.  Stock picking sucks.  SPX?  Hmmm.  When.

xcehn's picture

Share the laughable fantasy:

According to our team, 2012 will mark the starting point for the perpetuation of a new global power, Euroland.