FOREX TRADING

Over the past week, global market sentiment has soured again. Equities have moved lower and volatility a bit higher, but still remain on better levels than a month ago. Conditions in US credit and money markets appear relatively stable, but there are signs of intensifying stress in PIIGS sovereign, covered bond markets.

The expiry of the ECB 12-month LTRO on Thursday is creating jitters in the European money markets, where conditions have worsened despite a tightening of the EONIA EURIBOR spread. The 3M EONIA has risen to the highest level since July 2009, as markets are worrying that weak European banks may have difficulties rolling over short-term funding, although the ECB has announced that it will continue to provide liquidity at 1% full allotment in a three-month LTRO. (more…)

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. (more…)