While everybody is writing about the World ending today, the European “risk” markets are in positive territory. Although the Markets are very nervous, this could be the first derivative of the market telling us we will find some support levels today. Below, Italy, Spain and Portugal.
and Stoxx 5 day chart
Greed and Fear at it’s best. Before you start selling in total panic, check the below DAX chart. Short gamma are puking all over the place, in a total lack of liquidity. People selling in agony, are discounting a Flash Crash. For the brave ones (and maybe stupid) , buy this dip, as we should be seeing a snap up.
One of the few Economist worth listening to.
Moody’s maintains Triple A rating;
Moody’s Investors Service has confirmed the Aaa government bond rating of the United States following the raising of the statutory debt limit on August 2. The rating outlook is now negative.
Moody’s placed the rating on review for possible downgrade on July 13 due to the small but rising probability of a default on the government’s debt obligations because of a failure to increase the debt limit. The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa.
In confirming the Aaa rating, Moody’s also recognized that today’s agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run. The legislation calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period. In the absence of the committee reaching an agreement, automatic spending cuts of $1.2 trillion would become effective.
While the Chinese Downgrade it a notch. Xinhua reports,
The U.S. House of Representatives on Monday approved legislation to raise the U.S. debt limit by at least 2.1 trillion U.S. dollars and cut federal spending by 2.4 trillion U.S. dollars, one day before a threatened default.
The downgrade is a result of fights between U.S. political parties over debt issues, which reflects the government’s inability to completely solve the debt problem, said Dagong Global.
” The point is ladies and gentlemen that greed, for lack of a better word, is good. “
Christophe de Margerie, chief executive of Total, the French oil group, is to be questioned in court over allegations of corruption linked to the UN oil-for-food programme in Iraq, the FT reports. A French justice official said that a decision to refer Mr de Margerie and 18 other individuals to the Paris courts had been made by Serge Tournaire http://ftalphaville.ft.com/thecut/2011/08/03/641556/total-chief-faces-grilling-over-oil-for-food/
China’s central bank governor urged Washington on Wednesday to act responsibly to deal with its debt issues, saying uncertainty in the US Treasuries market will undermine the international monetary system and hamper global growth, http://ftalphaville.ft.com/thecut/2011/08/03/641536/chinas-central-bank-chief-warns-us-on-debt/
Spanish and Italian politicians rushed to formulate a fresh response to the debt crisis engulfing the two countries as their borrowing costs hit euro-era highs, the FT reports. José Luis Rodríguez Zapatero, http://ftalphaville.ft.com/thecut/2011/08/03/641456/spain-and-italy-face-fresh-crisis/
The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barackhttp://ftalphaville.ft.com/thecut/2011/08/03/641431/us-formally-retreats-from-brink-of-default/
The United States had its triple A rating confirmed by Moody’s and Fitch on Tuesday but threats of future downgrades remain, says Reuters. Moody’s Investors Service maintained the US Aaa rating, but assigned a negative outlook, http://ftalphaville.ft.com/thecut/2011/08/03/641436/moodys-and-fitch-affirm-us-ratings/
Syrian opposition activists are stepping up their lobbying for international sanctions against the oil industry to deprive the regime of a crucial source of revenue and cripple its ability to finance the mounting repression of popular protests. But while the activists are finding willingness for action in the US, the European Union remains reluctant to broaden its sanctions beyond specific officials and businesses that have direct links to the regime of Bashar al-Assad. http://www.ft.com/intl/cms/s/0/9e735f18-bd22-11e0-9d5d-00144feabdc0.html#axzz1TkVnqGOp
We have said it many times this year. Volatility has been Broken and Mispriced for a very long time. The Trader reads many reports and analysis on volatility, but one of the best pieces on vol this year is Artemis Capital Management piece on the Broken Volatility explaining why the vol market has behaved so “strange”.
Negative Panic = Negative Volatility: In financial markets normalcy bias provides a psychosomatic explanation as to why lower than appropriate volatility can be sustained for long periods of time despite increasing signs of systemic risk. This phenomenon was observable in 2007 as volatility remained at extremely low levels even after problems in the subprime housing market began to take root. The volatility of asset prices is widely considered a metric of fear and panic in financial markets, therefore the lack of sustained volatility following a market shock event could be viewed as a form of negative panic. If we accept that investors may subject to a consensus normalcy bias then it is logical to accept that negative volatility can also exist as a quantifiable response to exogenous shock events. Admittedly this may sound odd since volatility, by mathematical definition, can never be negative, so the term refers more to a cancellation of short-term volatility risk premium that should otherwise exist. The theory of negative volatility is a temporary state of low volatility caused by the market’s failure to acknowledge the enduring risks of a black swan event. The concept may go a long way toward explaining why high geopolitical risk can co-exist with extremely low volatility in the current market.
The Negative Volatility Regime: The behavior of equity volatility has undergone radical changes over the past three quarters the persistence of which is tantamount to a regime change as opposed to a temporary phenomenon. The current volatility market refuses to sustain fear in the wake of several shock events despite flashing continued warning signs of longer-term risks. The regime resembles a more extreme version of the volatility curves experienced between 2006 and early 2007 prior to the onset of the credit crisis. The new paradigm of volatility officially began after the May 2010 Flash Crash but the most extreme changes have coincided with announcement of the Fed’s second quantitative easing program in late-August. The new volatility regime is characterized by:
1. Large declines in spot volatility The past nine months have shown an unusually high number of large declines in spot volatility (realized and implied) that are of a much higher magnitude and length than what has been observed historically. As a result of these large declines the VIX index and short-term realized volatility are below historic averages; 2. Abnormally steep volatility curve The manifestation of an abnormally steep volatility curve (as a % of spot volatility) with a linear shape that more closely resembles a glacial cliff as opposed to the more traditional desert plateau (see chart); 3. Underperformance of Variance Hedges Low volatility-of-volatility on the back of the variance term-structure results in the underperformance of out-of-the-money options and variance as a hedge against market declines;
4. High Volatility Skew: High levels of volatility skew for far out-of-the-money options showing increased likelihood of large declines in equity prices.
Full report, artemis volreport
Buy the Dip, or Wait and see? Meanwhile, a video of last year’s biggest event, everybody has forgotten about.
The Debt issue according to Bill Gross. “Debt man walking….”
- Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
- In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
- Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.
Full article, click here.