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.