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Default worries grow on Belgian, French bonds, among others Add to ...

Credit Default Swap trends

The fear that governments will default on their debts got a whole lot more intense in the second quarter, and it wasn't just among the usual suspects, Greece and other members of the PIGS club. Default worries also increased markedly on bonds issued by Belgium and France, among others.

Market data provider CMA tracks credit default swap prices on government debt, and in its report on second-quarter trends said that 93 per cent of the countries it follows had rising costs to protect their securities against going bust.

"CDSs are extremely sensitive to perceptions of risk within the market. The credit markets move very quickly in reflecting investor sentiment around certain entities," commented CMA spokesman Simon Mott.

Credit default swaps are over-the-counter insurance contracts that pay out to those who buy them if a borrower is unable to meet its debt obligations. They're purchased by investors who want to hedge their portfolios against losses, as well as by speculators hoping to make money if borrowers get into financial difficulties.

For those countries experiencing higher prices, insurance costs increased an average of 30 per cent, an indication that investor sentiment was dismal as market players mulled over the impacts of deficits and the state of the global economy.

Greece, as the epicentre of the sovereign debt crisis, had the worst percentage increase, and the cost of its swaps soared by 190 per cent, followed by Belgium, up 169 per cent and Spain by 129 per cent. Insurance costs for French debt jumped by 112 per cent, although it's worth noting that the dramatic percentage increases for Belgium and France came off relatively low bases. One worrisome sign for the future is that credit default swap prices were on an increasing trend during the quarter, even though Europe and the IMF launched a massive rescue for Greece.


The world's riskiest sovereign credit, based on default insurance costs, remains Venezuela. Iceland and Egypt exited the list of the top 10 countries most likely to default, replaced by Romania and Bulgaria.

Norway led the list of countries deemed least likely to default, with Finland and the U.S. in the No. 2 and No. 3 positions respectively. The U.S. had the 10th-best credit at the end of the first quarter, but moved up the ranking as investors fled the euro zone in favour of U.S. Treasuries during the Greek crisis. Canada's risk of walking away from its debts isn't ranked because it doesn't have actively trade swaps.

The Railroad Chart

Nearly everyone is worried that the pace of economic growth in North America has been weakening, raising the odds of a double-dip recession, but don't tell that to the railroads.

The Association of American Railroads, an industry trade group, tracks the number of railcars that trains move every week in Canada, the U.S. and Mexico. Railways give a good insight into the economy because they carry everything from iron ore and new cars to inter-modal containers, those rectangular boxes scrammed with consumer goods sent here by the shipload from Asian manufacturers.

Rail traffic has been moving up steadily this year. In the latest reporting week, rail movements exceeded both their depressed levels from 2009, but also more noteworthy, the relatively more buoyant traffic levels recorded in 2008, before the worst of the recession. Container volume was the highest in more than two years.

The action on the railroads seems to suggest that fears the North American economy is slipping backwards are overblown, at least for the moment.

"A lot of people look at freight rail as a kind of concurrent indicator of what's happening right now," says Holly Arthur, a spokesperson for the association. "We're a derived demand industry. In other words, if people aren't building or buying, we aren't moving."

Canaccord Genuity has been following freight movements for the clues they give on the health of the economy. Its analysts recently wrote in their Energy Daily newsletter that the traffic numbers indicate "North America's economy is still on the path to recovery," although they are keeping an eye on figures for the summer months to confirm the uptrend remains on track.

Investors can follow the freight loadings, which are published every Thursday on the association's website.

Death Cross

The S&P 500 last week traced out a death cross, an ominous-sounding pattern that some market technicians view as a harbinger of further downside market agony.

For those who aren't cognoscenti of technical analysis, a death cross occurs when the 50-day moving average of an index, or stock, moves below its 200-day moving average. It may sound complex, but what a cross means is that recent average price of stocks has fallen below its long-term average.

The S&P death cross occurred on July 2. Other major indexes, including both the FTSE and the Nikkei, have been at or around death cross levels recently too, as have been commodities, such as copper.

There is a big debate about the value of the signal. Technically oriented analysts swear by the colourfully named indicator, and say the cross is a clear signal for investors to head for the hills, while skeptics contend it's got the predictive power of a coin toss.

"This death cross definitely is giving signs and evidence that we have a trend change, that we're going from a bull market into a significant bear market," contends Jeb Handwerger, editor of Goldstocktrades.com, a Miami-based market letter that uses technical analysis.

Mr. Handwerger says a major benefit of the cross is that it is unambiguous, unlike much technical analysis which depends on interpretation of chart patterns.

The last one occurred in late 2007, and Mr. Handwerger says those who heeded its warning were spared 2008's incredible market carnage.

But the Dynamic Wealth Report took a look at recent death crosses, and contends they have a mixed record. There have been four in the past decade on the S&P, and the report said they were "pretty useless" when it came to forecasting the direction of prices.

The most recent occurred in December, 2007. A month later, the market was down 11.7 per cent. The next cross happened in July, 2006. A month later, stocks were up 3 per cent. After the August, 2004, episode, stocks also rose in the next month, up 2.5 per cent. Then in October, 2000, stocks fell by 8 per cent in the month after that death cross.

"It's just as likely to mark the end of a market correction as it is to indicate the beginning of a new bear market," the report said.

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