Credit Default Swap market signals another trend? 26-Sep-2015

Since the beginning of this year, global financial market have been volatile and chaotic in uncertainty of geopolitics and economics. You easily remember Chinese stock market crashed recently, but we have experienced several events from beginning of 2015, which have driven the market.

(Remarkable events in 2015)
 Jan 2015: Swiss Franc Jumped 30% - 40% against Euro, and massively gone up against other currencies.
 Jan 2015: Greek election. SYRIZA lead by Alexis Tsipras became a leading party in Greek government.
 May 2015: UK general election. Although the leading party is Conservative party lead by David Cameron, opposition parties are restructured in larger scale. Labour and Lib-Dem lost certain number of seats, but Scottish National Party (SNP) got more seats.
 Jun - Sep 2015: Chinese stock market have continued going down, and other market including in UK, US and Japan have declined.
 Aug 2015: Chinese yuan (CNY) has been devalued.
 Sep 2015: Refugee crisis got attention. Number of refugees in this year became record high in Germany.
 Sep 2015: Volkswagen's emissions scandal. German car industry could face slowdown.
 Long term trend 2015: Natural resources including crude oil and iron ore, the price continues going down.
 Long term trend 2015: Currency has been weak in emerging market, including BRL, ZAR, MXN, MYR or PHP.
 Long term trend 2015: Currencies of natural resources provider, such as AUD, NZD and CAD has been weak as the interest rate has been lowered.


By the way, today's subject is about Credit Default Swap (=CDS) market. While such events have been occurred since the beginning of 2015, CDS market indicates some sense of another trend.
CDS market might be unfamiliar with some of you, but it is basically measured in credit spread for each entity. When the spread is widen, the market expect the referenced entity is losing its credit. When the spread is tighten, the market expect the entity is getting credit.

Around 2010 - 2012, it was sovereign  bond crisis, particularly Greek bond yield has shot up record high. 10 year Greek bond yield has gone up 25% - 30% at the peak. Since then, the market has been calm down. Compared with that time, the credit market is still stable.

However, CDS spread have been widening in some economic zones since early 2015. For example, Spanish banking industry have been getting wider spread sharply. Spain is facing political uncertainty about discussion of Catalonian independence. A political party, Podemos, could add another shot into the market.
On the other side of the planet, Australian banking industry have been getting wider CDS spread, too. Australian economy highly depends on Chinese demand, and the demand has been slowing down since beginning of this year. Chinese stock market crisis may drive the Australian CDS market further.
American, British, German and Japanese banking industries are relatively tighten.

It may be too soon to say crisis about Chinese stock market crush. It could be just the beginning of chaos.

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