Wednesday, November 23, 2011

US financial confidence indicators are flashing red

As the US market closed for Thanksgiving holiday, a dreadful feeling came over market participants in the US. With rumors circulating that Germany may in fact be OK with a eurozone-wide bond program (more on that later), the US market still closed at the lows - nobody believes the stories coming out of Europe these days. S&P futures broke below 1160, a 7% drop for the month.

All 5 of the US "financial confidence" indicators are showing increasing stresses in the system. Here they are:

1. The USD Swap Spread hit a new high:
USD 2-year swap spread (Bloomberg)

2. US 3-month LIBOR went above 50bp:

3. USD OIS (overnight index swap) spread blew out. This is the forward premium for term-funding over the overnight funding (gauge of fear to lend for longer period than overnight):
2-year OIS spread (2-year rate swap rate - 2-year OIS swap rate) (Bloomberg)

4. Dealer CDS has widened out significantly.  Below is Goldman CDS spread:
Goldman 5-year CDS (Bloomberg)

5. Dealer and bank stock prices hit new recent lows (GS, BAC, etc.)
GS stock (Blooberg)

We are entering a dangerous period reminiscent of 2008 when a major debt market crisis turned into a crisis of confidence in the financial sector.  Except this time it's the sovereign debt instead of the sub-prime mortgage debt.

All eyes tomorrow will be on Germany and the ECB for any signs of support. Happy Thanksgiving.

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