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.....
CLICK HEREfor 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.