Liquidity in the Eurozone . . . Fugly

Conclusion: Liquidity continues to weaken in European debt and loan markets, and Asia and the U.S. are starting to correlate.


As a leading indicator for equity markets, credit markets globally cotinue to flash warning signs.   Rates are increasing and spreads are widening as markets proactively adjust to the new reality of credit worthiness in the interconnected global market place.


In the chart below, we’ve highlighted Eurozone liquidity which is measured by recourse to the ECB over night deposit facility.  In effect, banks are basically warehousing every Euro bill they can find, rather than lending in Euros. And this is occuring at pace not seen late 2008.  


Coincident with this is Euro Libor continuing to widen, currently at a 2010 high of 0.65%.  This means one thing: liquidity is getting worse, not better.  Despite what the Fiat Fools (politicians) might be saying.


Also related to Eurozone liquidity is this excerpt form the newswires in reference to Spanish Banks:


“Elsewhere in the Spanish financial sector, newspaper Cinco Dias is reporting that second tier Spanish banks are being frozen out of the European interbank market and that only the largest institutions are managing to finance their operations smoothly, adding that the situation has worsened since the start of the week.”


While liquidity issues are clearly most prevalent in the Eurozone, they have natural derivative effects.  The most obvious is a decline of purchasing power, and thus slowing import demand. (Note: 1/3 of U.S. exports go the Eurozone.)  This will obviously lead to slower growth in the U.S. on the margin, but also slower growth in Asia.  Since loans and investments in Asia, specifically China, are predicated on high projected growth rates, a European credit crunch potentially has very negative impacts on Asian banks, and their growth based economies.


In fact, we are already starting to see Asian Sovereign Debt spreads widen dramatically, even if not at Eurozone levels.  Chinese CDS spreads have almost doubled in the last 30 days. 


In the U.S., one of the best proxies for short term liquidity is the commercial paper market.  The current 7 day commercial paper market in the U.S. hit levels of 0.61%, which are the highest levels since the equity market sell off in March 2009.  There is an estimated $670 billion of commercial paper maturing over the next couple of months, which will be reset at these higher rates.  The chart of 7 day commercial paper is outlined below.


The world is interconnected, and to believe that the issues in Europe are isolated would be naïve at best – which is exactly what the credit markets are telling us.


Daryl G. Jones

Managing Director


Liquidity in the Eurozone  . . . Fugly - ECB Liquidity


Liquidity in the Eurozone  . . . Fugly - 7 day

SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more