Data Diary

The risk rally that hints at sustained credit repricing

Posted on 16 June 2010

Once again the timely injection of central bank liquidity has stemmed the flight of the bulls.  The ECB has been busy funding scary debt from Spain and Greece at par, while the US Fed has done its bit by reinstating currency swap lines. The reflexive rally is now in full swing and can be seen in the relative strength of risk currencies against the USD – for example, consider the Asian dollar index:

When we last reviewed our risk measures (on 3 June here), we suggested that the augurs were in favour of such a rally.  The subsequent sedation can be seen in our risk appetite index:

Similarly, the CBOE putcall ratio has stabilised and is likely to trend lower still:

However, that credit spreads continue to march wider indicates that there has been a fundamental shift in the calibration of risk.  If we look to shorter term interbank swap rates the same trend prevails – EURIBOR and LIBOR looked to have bottomed in April coinciding with the peak in equities.

For mine, the working thesis is that we are in the second leg of a rally that should take us into early July.    As forthcoming economic releases continue to portray a global recovery running out of steam, we might expect that fear will once again begin to surface.  In any event, we’ll reassess the lay of the land when we get there.