A possible euro debt crisis?
GREEK stocks fell to a 25-year low on February 9 ahead of another bailout review to be conducted in the coming week.
The Athens Composite Index plunged to 439.08 on last Tuesday amid fear of another debt crisis.
The stock index has fallen about 26 per cent so far this year with another 10 months to go for the full year to complete.
Risky assets have slumped since the beginning of year due to global slowdown, lower crude prices and tighter credit borrowings are seen in US monetary.
In Europe, the cost of insuring against Deutsche Bank defaulting has gone up 2-1/2 times so far in 2016, on par to the previous debt crisis last seen in 2011.
Credit Default Swap (CDS) is an insurance against the debt issuer for defaulting in case of a financial difficulty.
Currently, the CDS is against Deutsche Bank which has risen to US$64 trillion, that is almost 20 times of the GDP of Germany.
Alternatively, the share prices of aforementioned entity has declined about 60 per cent in the past year and it is currently trading at US$13.30 per share.
Following the risk alarm in Deutsche Bank AG (NYSE: DB), other big debt issuers are Barclays PLC ( NYSE: BCS), Credit Suisse Group AG (NYSE: CS) and Standard Chartered PLC (LSE: STAN).
All their five-year CDS have widened 20 per cent or more since February.
Hence, it is no surprise on why stock markets have been plummeting in fear lately! Ironically, economists have blamed the European Central Bank’s failure to add more stimulus to its asset purchasing programme as a trigger for waning confidence.
However, we are know that the monthly purchase programme of 65 billion euros until March 2017 will probably throw cause a bigger debt deficit among the 19 nations if no recovery is seen by then.
For past week, we have seen Greek, Spanish, Italian and Portuguese yield moving higher in the 10 year bonds.
This is a tell-tale sign for investors to begin to dumping fixed-income assets.
While many debates have been going around on US’ monetary policy to standstill this year, or could it contain another few rate hikes, it has added fear for flight out of equity and fixed-income assets.
Slumps in crude prices for the past year is catalysts to a global recession.
As the energy instrument has stayed in price levels below US$30 per barrel, economist predict that some smaller oil producing countries like Chile and Venezuela could go bankrupt in another 12 months if there is no recovery in demand.
Moreover, the Middle East countries are fighting to survive now as their exchange rates are pegged to the US dollar.
Gulf countries cannot devalue their currencies to boost export volume of oil revenues.
Instead, they have attempted to cut spending or increase revenues through subsidy or tax reforms and capital expenditure cuts.
In our opinion, it will take another 12 months to check on the crude prices before we can forecast the geo-political factors in the Gulf regions or the supremacy dispute between Iran and Saudi Arabia.
Meanwhile, cut down your equity portfolio and stay alert for the US dollar movement that might be dropping soon.
Dar Wong is a registered Fund Manager in Singapore with 27 years of market experiences. The contents are his sole opinions. He can be reached at dar@pwforex.com.