Relative Strength Filter
December 17, 2010
Assoc: Tiberiu Stoichita/Rahul Muralidhar
European Financial Risk Breaks Out
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Figure 1: European Financial (Markit) and European Prime Broker (our .PrimeEU) Financial Default Risk; FTSE Global Banks
Source: BMO Capital Markets, Bloomberg, Thomson, Markit
· This morning, European corporate financial default risk breaks to the upside – Figure 1.
o This was a sell signal in the spring.
o This was a sell signal in November.
o This is a caution signal now.
§ What is different?
· If you carve out the too-interconnected-to-fail European prime brokers (our .PrimeEU index), and overlay this on the European Financial default risk chart, you see a definite lack of contagion.
o The core is solid.
o The caution, of course, comes as we assume that if overall European financial default risk continues to rise, then there will be a moment when the elastic band connecting the two (Figure 1 top) will force the too-interconnected-to-fail institutions into the fray.
§ Today, we get off with just a caution, but a big caution.