The MasterCharts: Market timing - European Financial Risk Breaks Out- Sell signal?
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Friday, December 17, 2010

Market timing - European Financial Risk Breaks Out- Sell signal?

 Market timing - European Financial Risk Breaks Out- Sell signal?

CONCLUSION: As our mark Steele points out below, European corporate financial risk is breaking out...this was a SELL signal last spring. Yet this time so far, there has been a definite lack of contagion. The elastic band is being tested.....

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December 17, 2010
Research Comment
Mark Steele
(416) 359-4641
Assoc: Tiberiu Stoichita/Rahul Muralidhar
European Financial Risk Breaks Out
CLICK HERE for a printer friendly version of this report including research disclosures.




Figure 1: European Financial (Markit) and European Prime Broker (our .PrimeEU) Financial Default Risk; FTSE Global Banks




Source: BMO Capital Markets, Bloomberg, Thomson, Markit


· This morning, European corporate financial default risk breaks to the upside – Figure 1.

o This was a sell signal in the spring.

o This was a sell signal in November.

o This is a caution signal now.

§ What is different?

· If you carve out the too-interconnected-to-fail European prime brokers (our .PrimeEU index), and overlay this on the European Financial default risk chart, you see a definite lack of contagion.

o The core is solid.

o The caution, of course, comes as we assume that if overall European financial default risk continues to rise, then there will be a moment when the elastic band connecting the two (Figure 1 top) will force the too-interconnected-to-fail institutions into the fray.

§ Today, we get off with just a caution, but a big caution.

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