Stress Indicators : Close to margin call?

The Stress Indicators reflects the margin call on banks from global central banks - and US Dollar positive bias is again increasing.

We conclude business cycle is hitting a new low - the next move is probably a small recovery for 30-40 days.

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I have been on and on about the increase in VaR - value at risk - over the last week or two, and now it's showing up in the Stress Indicator Report-

More precisely through "relatively weaker" banks and banking sector:

The Itraxx Europe Senior Financial Index is close to breaking 200 level, if so we need to pay attention as it would mean further pressure on banking sector.

When looking at the bank sector I always find it constructive to look at the perceived stronger bank and management - In the US that would be Jamie Dimon and JPMorgan Chase –

Interestingly JPM have broken prior high in CDS price back from March - I personally think Bernanke last conference call was "margin call on banks". Central bankers globally is nervous about the "bubbles" in assets and mainly the renewed success of CLO, CDO et al - three letter words we thought died in the financial crisis in 2008/09!!

On the FX market side it is very important to note how the 25 delta Risk Reversal - I.e: the price of buying a 25 delta EUR put vs. buying a 25 delta EUR call - have moved close to 2% - This would generally indicate market believes the EUR put - the downside is far more likely than the upside.

Meanwhile in the "real world" - our growth indicator continues to weaken despite slightly rising economic data. Copper is often said to have PhD in Economics (Better than 99% of all economist in predicting market!):

To really appreciate the changes in fixed income market a look at real rates (here defined as 10 YR yield minus GDP deflator) is always a good place. Note how the old range of +40 bps to -40 bps was not only broken but have moved a full range up - this is what has been killing Gold recently - and of course bonds. FOMC may not do much before December but the market has repriced due to this and bloated VaR:

I still see upper range test for 10 YR US FI income rates although the market is extremely overbought (in yield terms)

 

Finally, the mighty stock market....It's tempting to buy the lows here ....but using my old T-theory model the target remains 1529.00/1520 and 1600/10 should offer some resistance...

 

Conclusion/Strategy:

Key risk:

Banking sector is getting MARGIN CALL from central banks - Federal Reserve, ECB and Bank of England have all called upon banks to increase capital - I think it has a lot to do with all of them getting increased power to regulate, meaning they can no longer ignore the bubble they have created through "too easy money for too long".....

Funding rates is rising again in Club Med - and no one more than the new comer: France. OAT continues to underperform....

On the positive side CESIUS - Citigroup's surprise index is rising, gasoline prices falling (high correlation to survey data), policy makers will try to reverse all the "tapering" talks of last two weeks.

Net though - Copper does not lie - global growth at low for cycle......  Bank stocks leads up and down - they look very vulnerable on downside now.....  EU is having tough autumn with German election on September 22nd.....

Strategy:

Took profit on all RISK-OFF trades Thursday/Friday - right now long S&P (watching 1610-00/1605-00) - long US Dollar (vs. JPY, AUD, and EUR) (believe business cycle turning slightly positive next 30-50 days),  Short 10 Y- US - and long DAX 25 delta August call (insurance)..

Safe travels

Steen