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5 August 2010
Monitor
Euro debt crisis watch
The euro debt crisis has calmed down significantly over the summer. The stress
Watch list
tests of the European banks and successful bond auctions by Spain have dampened
fears that the debt crisis will spiral out of control. A strong earnings season – not least Regulation of the financial system
for banks – has also contributed to a sharp recovery in risk appetite with strong remains at the forefront of things.
performances of equities, credit and commodities. The questions surrounding CDS
The stress tests of 91 European banks on 23 July showed that only seven banks bans remain unanswered
failed. While this put into question the severity of the stress tests, the significant ECB PIIGS purchases
amount of disclosure was a positive surprise (see Research – Euroland: Market
Upcoming PIIGS bond auctions
implications of the European stress tests).
Ireland, 17 August
Spreads of PIIGS government bonds have narrowed considerably. The main
exception is Greece where spreads have stayed high. CDS spreads on PIIGS have Spain, 19 August
also come down. Spanish bonds have performed particularly well as Spanish stress
Italy, 30 August
tests surprised positively and bond auctions have been successful.
Possible downgrades by rating
IMF, EU and ECB have given their first review of Greek budget developments
agencies
today in relation to the emergency loans. They conclude that Greece has got off to a
good start but that important challenges and risks remain (see press release). Finalisation of the Basel III
calibration and phase-in
The ECB’s purchases of government bonds have come to a halt as markets have
arrangements in September
started functioning on their own (see chart below).
Next review of Greece from ECB,
Corporate credit spreads have fallen significantly and issuance of corporate debt
EU and IMF in October
has picked up. iTraxx Crossover now trades at 459, down from 628 at the peak in
June. Covered bonds have also performed but less so than other credit.
The stress tests have contributed to more clarification over the state of the banks and
this has contributed to a decline in forward money market rates. The EUR 6x9
FRA-Eonia spread has declined from 50bp to just below 30bp. 3M EUR Libor-OIS
has come off slightly to 31.8bp but not as much as 3m US Libor-OIS which is trading
at 24.5bp.
130 22.5
EUR bn ECB purchases, EUR bn
per week >>
110 17.5
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Monitor
% % % %
20 Germany Greece 20 7 Germany Spain Italy 6
18 18 6 Portugal Ireland
16 16 5
14 14 5
4
12 12 4
10 10 3
8 8 3
2
6 6 2
4 4 1 1
2 2
0 0 0 0
Jan Feb Mar Apr May Jun Jul Jan Feb Mar Apr May Jun Jul
2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010
Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets
Source: Bloomberg and Danske Markets Source: Bloomberg, Ecowin and Danske Markets
Sovereign 5yr CDS selected Euroland countries Covered bond spreads selected Euroland countries
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Broader contagion
Spreads outside PIIGS (5y spreads vs. Germany) 1y basis swap. 3m euribor vs. 3m USD libor
bp bp -15 -15
bp bp
160 Belgium France Holland 160 -20 -20
140 140
120 -25 -25
120
100 100 -30 -30
80 -35 -35
80
60
60 40 -40 -40
40 20 -45 -45
20 0 -50 -50
0 -20
-55 -55
Mar Apr May Jun Jul 2010
2010 2010 2010 2010 -60 -60
Dec 09 Feb 10 Apr 10 Jun 10
Source: Bloomberg and Danske Markets. Note: Change to new benchmark in Source: Ecowin & Danske Markets
French 5yr by
Source: Bloomberg and Danske Markets Source: Ecowin & Danske Markets
European credit markets - Itraxx CDS 5yr indices US credit markets CDX 5yr indices
60 60 70 450
40 40 60 400
Jan 2010 Mar 2010 May 2010 Jul 2010 Jan 2010 Mar 2010 May 2010 Jul 2010
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Bank CDS aggregated 5yr Senior CDS Selected banks 5yr Senior CDS
ASW spreads on the 1st Schatz, Bobl and Bund futures 2 year and 10 year US swap spreads
90 90 70 70
bp 1st Bund ASW bp bp US 2yr swap spread bp
80 80 60 60
1st Schatz ASW US 10yr swap spread
70 1st Bobl ASW 70 50 50
60 60 40 40
50 50
30 30
40 40
20 20
30 30
10 10
20 20
0 0
10 10
0 0 -10 -10
Oct 2009 Dec 2009 Feb 2010 Apr 2010 Oct 2009 Dec 2009 Feb 2010 Apr 2010
Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets
112 112 50 50
Index (02/02/10=100) % %
108 108 45 45
104 104 40 EURO STOXX 50 40
S&P Global 1200 vol index
100 100 35 35
96 96 30 30
92 92 25 25
88 S&P Global 1200 88 20 20
Financials Vix Vol index
84 84 15 15
Feb Mar Apr May Jun Jul Feb Mar Apr May Jun Jul
10 10
Source: Ecowin and Danske Markets Source: Ecowin & Danske Markets
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1.55 98 19 19
EUR/USD USD/JPY (r.a.) EUR/USD USD/JPY
1.50 96 18 18
17 17
1.45 94 16 16
1.40 92 15 15
14 14
1.35 90 13 13
1.30 88 12 12
11 11
1.25 86
10 10
1.20 84 9 9
1.15 82 8 8
Nov Jan Mar May Nov Jan 2010 Mar May
2009 2010 2010 2010 2009 2010 2010
Source: Bloomberg & Danske Markets Source: Bloomberg & Danske Markets
Source: Bloomberg & Danske Markets Source: Bloomberg and Danske Markets
6M5Y EUR normalised Swaption volatility 5Y5Y EUR normalised Swaption volatility
95 bp 95 85 bp bp 85
83 83
90 90
81 81
85 85 79 79
80 80 77 77
75 75
75 75 73 73
70 70 71 71
69 69
65 65
bp 67 67
60 60 65 65
Dec Feb 2010 Apr 2010 Jun 2010 Aug Dec Feb 2010 Apr 2010 Jun 2010 Aug
2009 2010 2009 2010
Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets
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Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of
this research report are Allan von Mehren, Chief Analyst and Lars Tranberg Rasmussen, Senior Analyst.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
quality research based on research objectivity and independence. These procedures are documented in the Danske
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
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Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’
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Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
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