Credit Risk breaking up-Implies SPX 1200
Some interesting aspects of risk, that is not reflected in neither the Libor, OIS spreads, nor the equities market. Below from Capital Context;
The credit risk of the 30 most systemically critical financial entities in the world just broke an important channel and is at its highest in over four months at 135bps with its largest three-week rise of over 14% since Nov2010.
The geographic split is evidently more concentrated in European entities than in the US and Asia, as seen in the chart below, and we also note that while a cursory glance shows considerable dispersion (the table is sorted worst to best in each geographical region), it is clear that migration (or discrimination) among these banks is drifting upwards. North American components average 120bps, European components average 138bps, and Asian components average 126bps.
With China raising rates (and a housing bubble seemingly bursting), Japanese stress from the vicious circle of the tsunami and macroeconomy spiralling with a weak demographic, European banks clearly burdened by mismarked sovereign debt on their books, and a US financial system that continues to practice extend-and-pretend all the time hosuing weighs heavy and TLGP debt must be refinanced, it would make sense that risk is elevated.
Below is the famous 30 VIP list
Thetrader has argued over the past weeks that risk in the equities market is not priced “correctly”. People seem to only price the percentage moves, without any kind of risk factors that could arise from external factors such as Sovereign Default, Fukushima (that sent Japan into recession), Spain protests spreading, debt ceiling breach etc). We clearly see, that despite the “VIP” 30 credit risk graph breaking up to November levels, Vix is substantially lower than in November. In November Vix index was trading at 23-24. SPX in November was at 1200 level. “Real” measures of risk are implying the market much lower, but maybe it is simple, just wait for QE2 to end, and the secret futures buyer will vanish?
