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It Does Not Look Healthy

06 July 2016 by lberuti

Financials are the focal point of everybody’s attention at the moment. DB ( Deutsche Bank AG ) attracted some of the limelight today as its stock reached a new all time low and is now under threat of being dropped from the Eurostoxx 50. Its 5 year risk premium is now back to the widest levels of the year. But the hot potato at the moment is MONTE ( Banca Monte dei Paschi ). Its 5 year risk premium was another 19bps wider at 603bps, as a credit event is fast becoming a distinct possibility. Headlines quoting the president of the Eurogroup as suggesting that institutional investors may take a greater hit than retail holders in any bail-in when he said “authorities are allowed to take additional measures in case of a bail-in to assist vulnerable groups” did nothing to reassure them. Effectively, even more striking than the 5 year CDS widening is the flattening of the curve on the short end. Near term worries are obvious when you consider that 1 year protection has widened almost 200bps more than 5 year protection during the last week, and is now roughly trading at the same level. That move is the vertical pin you can see on the right end side of this grapple.