week in review


According to the Eurostat, Euro area annual inflation rose to 1.8 % in January. The most important thing is that Italy’s inflation revised up to 1% in January of 2017- it’s the highest inflation rate since August of 2013.

In January 2017, the lowest annual rates were registered in Ireland (0.2%), Romania (0.3%) and Bulgaria (0.4%). The highest annual rates were recorded in Belgium (3.1%), Latvia and Spain (both 2.9%), and Estonia (2.8%). 



Potential of a Greece default- An  Italian bail out – Alarm from Spain and Portugal

German bond market yields fell as rising predictions of Le pen victory. The European Central Bank’s bond-buying speculation led to a two-year German bond yields down. Therefore, two-year German bond yields reached at new low. In addition to the strength in German bonds, German 5Y Credit Default Swap (CDS) spreads are narrowing while Portugal, Italy and France 10Y spreads are widening over Germany. In other words, their borrowing costs are rising versus Germany.



The euro break-up risk led the french yields to set for biggest weekly fall in 7 months. You can see the chart below that there is  some panic between the bond investors as Le Pen, who has plan  to break-up the euro, narrows gap.


A very interesting chart from @joshdigga !

It seems that Fillon’s presidential election odd leads to increase the 10Y spread much more than the Le Pen’s.




The euro remained under pressure this week as rising euro break-up risk and French political election uncertainty. Political uncertainty in EU and US impact the prices and dollar fell on US policy doubts this week.


Upward Revision

Britain’s economy grew 0.7 % in the fourth quarter of 2016.

Britain’s economy grew 0.7 % in the fourth quarter of 2016  because of the sharp depreciation of the pound which leads to import more expensive in the UK, but business investment (firms’ demand for capital) in the UK  decreased by 1% in Q4 2016.

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How the FTSE and pound have changed since Brexit…


That view was echoed by Howard Archer, an economist at IHS Global Insight.

Source: http://www.independent.co.uk/news/business/news/brexit-gdp-growth-final-quarter-2016-07-per-cent-revision-a7592751.html

You can see from the graph above that the value of pound fell sharply against the dollar after Brexit.

Chart of the week!


The US is still the world’s biggest economy..

The four biggest economies in South America (Brazil, Argentina, Venezuela and Colombia) produce only about 4% of global GDP, while Africa’s three biggest economies (South Africa, Egypt and Nigeria) produce no more than 1.5%.

Source: https://howmuch.net

China produces about 14,84 of global GDP, while Germany, France, Spain, Italy and United Kingdom all produce 15,73 of global GDP.


Gold reacted negatively to interest rate hikes, so gold prices rose this week after Fed minutes suggested interest rate hike later.

Concerns over rise in US crude supply !

Oil prices were down after US crude inventories rose for a 7th week..

Useful article here:

With shale oil production like this, who needs Trump?



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week in review




According to the Eurostat, seasonally adjusted GDP rose by 0.4% in the euro area (19) and by 0.5% in the EU(28) during the Q4 of 2016.


France 5Y Credit Default Swap (CDS) spreads have blown out this week as rising in populism risks. France 5Y CDS spreads reached their highest level after the Brexit.

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Greece Inflation – 10y Bond Yields


Greece consumer prices rose in January, led by transport, housing, alcoholic beverages and tobacco costs. It was the first increase in consumer prices since February of 2013. According to the IMF, Greece has massive public debts and  needs to lower pensions and cut tax rates.

Greece needs help!

Here’s the chart from  Moody’s: Trouble!


Italy- return on assets is low!

According to the OECD, Italy is one of the few OECD countries where the tax administration agency does not have a staff development plan and does not regularly evaluate staff. Moreover, Italy’s non performing loans (NPL) ratios have been historically higher than in other European countries as the banking sector has long faced structural challenges due to poor governance, especially among many cooperative banks, high fragmentation and operating costs.

You can read the full report here:



Very useful article from ValueWalk:  I Agree!

Greece has one foot out EU door, but Italy where concern should be focused:



Emerging Market Currencies


Russian rouble performs very well in 2017, comparing the other emerging currencies. Ruble is led by slightly increased oil prices. The Brazilian real also continues to perform well under a rebalance government spending, rising commodity prices. South Africa’s rand reached its best levels in 15-months against the US dollar on Tuesday, after the data showed that the country’s unemployment rate fell to 26.5 % in the last three months of 2016 after reaching a 12-1/2-year high of 27.1 % in the previous period.

The russian ruble appreciated as oil rose from 2014 to 2016, but this usual relationship broke down in early 2017.

Good article here:



In 2017, Brazil economy started to perform well as rising commodity prices and falling inflation rate in response to the weak economy, comparing to its emerging peers.



However, Brazil’s economy is still suffering. There is still a political uncertainty, downgrade risk and huge government debt burden in Brazil. Therefore, the 5Y  Brazil CDS spreads have become wider again and the risk of default probability is higher than the South Africa and the Russia. In Emerging Economies, sovereign yields spreads narrowed since June as rising commodity prices.

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The emerging markets debt asset class has grown tremendously in the past two decades.

Useful article here: http://marketrealist.com/2017/02/case-emerging-markets-bonds/

Growth in market size has been driven primarily by the increased issuance of local currency-denominated sovereign bonds, as well as corporate bonds.




Retail sales in the United Kingdom fell unexpectedly by 0.3 % month over month in January 2017, due to increased prices in fuel and food.



US Federal Reserve chair, Janet Yellen, said it may be “appropriate” to raise interest rates at one of its upcoming meetings and signals March rate hike is possible. Us treasury yields decreased on Friday, but they will increase  as inflation picks up  if the Fed hikes rate in March.  (Yield curve is flattening as rising the fed rate hike probability)..




Performance of 10 year Bond Yield Chart today..

Bond yields moved higher this week  after Yellen said March hike is on the table.


TREASURY SELL-OFF / Chart of the week!


As you can see the chart above, foreign holders hold a smaller amount of US government debt than before.

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The Euro gained against the pound this week despite of French election and Greece concerns. The pound dropped against the dollar on Friday after the economic data showed UK’s monthly retails sales fell unexpectedly in January, leads to increase concerns that higher consumer prices may weigh on consumer-driven growth.


Gold prices edged lower as the potential fed rate hike in March. Oil was lower this week as EIA (Energy Information Administration) said that US stockpiles of crude and gasoline hit record highs.

Latest5Y CDS spreads..

Mexico 5Y CDS spreads have widened quicker this month. The insurance cost against European sovereign debt is rising as French election risk, Italy’s high non-performing loans ratio and Greece debt concerns.


Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

Source: Deutsche Bank/Marketwatch

week in review

Euro area

Germany Trade Surplus hit record in 2016

German Trade Surplus reached a new record high at EUR 252.9 billion in 2016, surpassing the previous high of EUR 244.3 billion in 2015, as exports rose more than imports.


Record German trade surplus add to political risk…German 5Y Credit Default Swap (CDS) spread has widened after the Brexit and Italian Referendum..Now, German CDS spread started to price the French presidential election..


France 5Y CDS spread is still widening as rising concerns/uncertainty over the impact of elections. France’ default of risk probability for now is higher than the Brexit referendum.

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Source: Deutsche Bank

This chart below shows the bond market volatility around national elections and EU-scepticism. Anti-EU sentiment in elections has had a greater impact on market volatility over time.



Target2 balance is a key indicator of Europe’s balance of payments crisis. Very good article here by Valuewalk:


The excess liquidity created by the ECB’s QE program is not staying in peripheral countries but leaking out to creditor nations such as Germany, leading to rising Target2 balances, the JP Morgan said.

When the Bank of Italy, via its QE program, buys bonds from a German bank or a U.K. bank with an account in Germany, this flow causes a rise in Bank of Italy’s Target2 deficit and an increase in Bundesbank’s surplus, Morgan explained. Similarly, when the Bank of Italy buys bonds from a domestic investor who uses the proceeds to buy a foreign asset, the Bank of Italy’s liability with the euro system grows.

Several Italian banks are still suffering.

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Portugal and Italy /Non Performing Loans (NPLs) are still not dropping. On the other side, Ireland NPLS fell sharply between 2013 and 2016. According to the OECD, Portugal investment is still very low, comparing the periphery countries. It seems to me that it is difficult to improve profitability for Portuguese banks. The second graph below shows the how Portugal’s growth and net savings contracted from 2007 to 2016. For the link:


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According to the IMF, Greece still faces fundamental challenges: (i) a vulnerable structure of the public finances; (ii) significant tax evasion and an ineffective tax administration; (iii) impaired bank and private sector balance sheets; and (iv) pervasive structural obstacles to investment and growth. Moreover, its public debt remains highly unsustainable, despite generous official relief already provided by its European partners.

Greece says that the IMF is too pessimistic about the future, but the data shows that the IMF is right.

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Of course, Greece CDS 5y spread (or the cost of insuring Greek government debt against default) has blown out and Greece 2-year bond yields hit 10% yesterday as creditors continue to disagree.

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According to Fitch Ratings, number of ‘AAA’ rated countries lowest since 2003, reflecting the longer term impact of the global financial crisis. Fitch’s AAA sovereigns are : Australia, Canada, Denmark, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland and the United States.


However, if you can stomach the risks, big upside is seen in European stocks..Europe is the cheapest it has been to US in nearly 40 years..

Very useful article here : http://www.cnbc.com/2017/02/09/these-stocks-havent-been-this-cheap-in-40-years.html


Very nice Euro area overview that is written by Chris Bailey @financialorbit:

Populists are not going to crash and burn global stock markets


Chart of the day!

Foreign governments have been selling US Treasury bond and notes at a record pace..


The  US  dollar started to increase from 2014, so global central banks have been selling treasuries in order to defend their currencies. Moreover, global uncertainties and inflation expectations play a major role in these selloffs.

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The difference between the VIX and the Global Economic Policy Uncertainty Index is now at the highest level on record.


Keep watching bond yields and gold.. They will signal approaching the market volatility..


Euro under pressure during this week against the dollar as rising political risks in EU.

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Lastly, copper, oil, US wheat, silver, corn, coffee and cotton gained during this week. Oil prices rose as OPEC output cuts at record compliance 90% says: IEA (lifted global demand forecast.)

Copper tends to move in line with Chinese industrial activity.




week in review


According to the Eurostat, Euro area annual inflation up to 1.8% in January of 2017, it is the highest inflation rate since February 2013, boosted by energy prices. Euro area GDP growth advanced by 0.5%  during the Q4 of 2016, compared with the previous quarter and unemployment reached at 9.6% in December 2016, it is the lowest rate since May 2009. Industrial producer prices rose by 0.7% in the euro area in December 2016, compared with November 2016. The seasonally adjusted volume of retail trade fell by 0.8% in the EU28 in December 2016, compared with the November 2016. According to Markit Economics, Eurozone Manufacturing PMI hits 69-month high at start of 2017. National PMI data shows  that growth was fastest in Austria, the Netherlands and Germany.

You can read the full report here:


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Spain inflation reached the highest since October 2012. Consumer prices in Italy are also expected to rise 0.9% YOY in January 2017, following 0.5% increase in the previous month. German inflation is so close to 2% which the European Central Bank (ECB) aims at inflation rates of below, but close to, 2% over the medium term. In summary, inflation is rising in Europe..


However, unemployment rates are still high for Greece, Spain, Cyprus, Italy, Croatia and Portugal. Germany’s unemployment rate fell to a record low this week. The gap between Germany and these European countries  unemployment rates continue to rise. For example, Italy’s unemployment is rising sharply after 2012 which ECB started bond buying program. As I always say, the European QE is not effective as it seems, created the imbalances in Euro area.

Graph source: Zerohedge/EuroStat

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VSTOXX, Euro STOXX 50 Volatility Index, is the ‘European VIX’ which measured the volatility, seems low in Euro Area for now, but rising political risk and uncertainty over the European elections in 2017 will cause the Euro Stoxx 50 Volatility Index (VSTOXX) to go higher than its average. For example, France 5Y Credit Default Swap (CDS) spreads continue to rise as growing political risk. Moreover, the gap between March and April volatility shows depression about France’s election when you look at the Euro Stoxx futures volatility curves below.


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Low Volatility by Historical Standards, But High Political Risk

Very useful article here about volatility : The average US VIX level in January (11.6) was the third lowest  January on record..Trump policy uncertainty will also continue and trade protectionism will have a negative impact on global financial markets.



It seems to me that the spread between the European VSTOXX and the US VIX will widen in next few months. Euro are growth advanced, but new bond supply is not growing..



Ten of European bond issuances had a ‘C’ rating by S&P metrics in 2016..


Euro Periphery Bond Yields

The yield between Italy and Germany has widened again as political concerns despite of ECB’s bond buying program (QE). Portugal 5Y CDS spreads continue to blow out dangerously. Spain 5Y CDS spread is going well, comparing to other periphery bond yields. After rising political concerns, Germany 5Y CDS spreads  also start to rise..

You can see the detail below from the latest CDS spreads.. Turkey 5Y CDS spread is tightening..Ireland and Austria CDS spreads has widened from a little this week.


 Japan and UK 5Y CDS spreads are so close to each other again and both of them are tightening. (the perceived risk of default is decreasing)


CHINA reweb2.pngChina’s risk is widening and China’s central bank raised a key lending rate for the first time in 6 years as worrying about the movement of credit growth.

Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds

CDS source: Market Watch/ Markit Economics/ Deutsche Bank

Black Rock Sovereign Risk Index include different results for some countries in December 2016. BSRI is looking at the: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%) for countries. You can read here: https://www.blackrockblog.com/blackrock-sovereign-risk-indicator/

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For example: Turkey scores most highly on Fiscal Space  while China scores most highly on External Finance.

Talk effect on the Dollar : Keep on talking..




Euro gained again against the US dollar this week..Australian Dollar hit to a 3 month high against the US dollar as exports boom.

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Gold gained while copper and natural gas weakened this week. Gold demand increased to 3 year high as political disruption. Oil also gained after first month of OPEC cut..



Global reflation has been good for Emerging assests historically.. US Sovereign yields and equities are still rising. Dollar – Treasury positive correlation continue to weaken in 2017.

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Lastly, according to S&P ratings, 9.6$ trillion in rated corporate debt is scheduled to mature globally through year end 2021…(Credit conditions affected from Brexit, geopolitical concerns, growing populism, rising interest rates and volatile currencies..)