Forex Fundamental Analysis – Euro Debt Crisis Watch
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There have been further signs of improvement in financial markets over the past week and volatility continues to decline. That said, many markets continue to trade with pretty high risk premiums, elevated volatility and reduced liquidity.
Yesterday, BNP Paribas’ long-term issuer default rating was downgraded to AAfrom AA by Fitch. Standard & Poor’s yesterday published a review of the asset quality of the Spanish financial system, which included an upward revision of expected losses for the real estate sector.
Conditions in covered bond markets in Portugal, Ireland and Spain have been worsening lately, and the problems in the Spanish and Portuguese banking sectors remain an important theme. It is notable that there has been some stabilisation in the covered bank spreads in the past two days.
Over the past few week, most sovereign spreads have been relatively flat in PIIGS. Spanish spreads have narrowed substantially following a couple of strong Spanish bond auctions last Thursday. In core countries such as France, the Netherlands and Belgium, spreads have narrowed a little over the past week.
Money market tensions have eased further. In particular, the FRA/EOINIA spreads have tightened. The improvement is also evident in swap and credit markets, but corporate issuance remains very low.
The euro has advanced a little versus the dollar, but it is questionable how sustainable this move is. Implied volatility in majors FX crosses has declined sharply from recent weeks, but is still at elevated levels.
Global stock markets have had a good run during June.
Watch list for the coming days
- Regulation of the financial system remains at the forefront of things. The questions surrounding CDS bans remain unanswered.
- Further ECB intervention. Is Spain next?
- France to announce details on fiscal austerity measures.
- Upcoming PIIGS auctions – Portugal to sell EUR800m 2015 bonds (23 June)
- Possible downgrades by rating agencies and focus on banking sector problems.
- G8-G20 Heads of State meeting (25-27June).
- Deadline for applying for recapitalisation via the Fund for Orderly Bank Restructuring (FROB) in Spain on 30 June.
- One-year long-term refinancing operation (LTRO) matures on 1 July.
- European bank stress tests to be released mid-July.
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