Fire In the Hole! European Libor Exploding to the Upside

Conclusion: European LIBOR is signaling that the European banks stress tests to be released this Friday may have some negative surprises.

 

While we have transitioned our short eyes to the U.S. dollar and the U.S. markets, European liquidity issues remain an important topic in global risk managment.  Below we have highlighted a chart of three month Euro LIBOR, which is the rate at which European banks will lend to each other in Euros.  Most market participants view it as a measure of fear and counter party risk between European banks, and rightfully so.

 

As we can see in the chart below, despite all the rhetoric from government officials about banks passing stress tests and the such, the banks themselves are voting.  And with three month Euro LIBOR up over 30% in the last three months, and projecting upwards and to the right, the statement is fairly obvious.  The credit worthiness of European banks is being question by their very own peer group.  That’s not good for liquidity in the Eurozone.

 

A few weeks ago we highlighted the allocation by banks to the ECB deposit facility as it was reaching record levels.  Our point, then, was that rather than lending to other banks overnight, many European banks had opted to store Euros with the ECB.  That facility has fallen from its peak of $384 billion to $58 billion Euro.

 

Typically this decline would be perceived as positive in terms of liquidity within the system, but taken in conjunction with intra bank lending rates increasing it actually suggests just the opposite.  In combination, there is less money in the intra bank system and it is being lent at a higher rate.  So less money, and a higher cost.

 

I asked our Financials Sector Josh Steiner if there were any financials specific information that we should be thinking about when considering the above data points.  His response was: “It all goes back to the sovereign debt. Euribor rising is because banks are nervous, and if banks are nervous it’s because of counterparty risk which itself is a derivative of sovereign risk. All interconnected.”

 

In the mining industry fire in the hole is yelled out prior to an explosion in a confined space.  Even though Europe isn’t a confined space, Hedgeye is officially yelling, “Fire In The Hole”, ahead of the results of the stress tests of European banks to be released Friday.

 

Daryl G. Jones

Managing DIrector

 

Fire In the Hole! European Libor Exploding to the Upside - EUR LIBOR


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