The Eurozone Reached 2009 Levels of Corporate Spread 🏢

🐺 Hi pack-mates,

This is Howling Markets, the kind police officer directing the traffic caused by the financial markets news and ensuring that only the most interesting and important ones get to you!

Today we will be covering:

• What Is Spread? 📊

• Metals Update: Big News for Copper and Gold 🪙

• The Eurozone Reached 2009 Levels of Corporate Spread 🏢

•  Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What is Spread?

In simple terms, a spread is the difference in the interest rates offered on two different debt securities. The most common types of spread are calculated between the government bonds of two countries, between the same class of bonds at different maturities and between different classes of bonds at the same maturities.

For example, it is possible to calculate the spread between the 10 year German government bond and the Italian 10 year government bond. But, why would it be useful to calculate a spread?

Well, if we imagine a hypothetical world where no risks were present, including the risk of default, all annual interest rates across all classes of debt securities, countries and time frames would be the same.

This is because if we hold a bond for one year and we assume simple interest rates, we would earn the face value times the interest rate. If instead we a bond with a maturity of two years, we would earn the face value times twice the interest rate, which would be the same as buying two bonds with maturity of one year for two years in a row.

So, why would the spread increase? The spread is used as a measure of the relative risk between two types of debt assets. The higher the spread, the riskier is the debt security with the higher interest rate, compared to the one with the lower interest rate.

In our economy, the spread is one of the most carefully studied metrics as it is an extremely powerful tool that can be used to forecast economic slowdowns, defaults and recessions. We will go over a very interesting spread reading after the next big news about metals.

Metals Update: Big News for Gold and Copper?

Precious metals definitely have a beauty to them, but it is not true that is impossible to make money trading vile and industrial metals too.

Copper is on track to close the year as the best performer industrial metals, up over 3% since the beginning of the year.

This exceptional performance comes from the fact that copper always faced a constant and increasing demand based on the multiple uses in the various fields in which this metal is applied. From construction to car manufacturing, copper has always been a staple metal.

Additionally, throughout 2023 the Anglo American production of copper fell and one of the largest copper mines in the world, operating in Panama, was shut down. These two events restricted the supply of copper by 3%, removing 750,000 tons from the market.

On the other hand, it is also worth mentioning the exceptional performance of gold. After retracing by around 5% from its all-time high set on the first of December, the price has surged up once again and it is currently sitting slightly below this value, consolidating a +12% run since the beginning of October.

Do you believe that industrial metals might offer interesting trading and investing opportunities, or that it is better to stick with precious metals?

Today’s Howling Question

In this newsletter we have briefly talked about the exceptional performance of copper during the last couple of months, but do you know which is the current price of this industrial metal?

a) $2.6 per pound

b) $3.1 per pound

c) $3.7 per pound

d) $3.9 per pound

e) $4.2 per pound

Try to answer the question and then check out the correct option after the last interesting news.

The Eurozone Reached 2009 Levels of Corporate Spread

Among other tools, corporate spreads are one of the main indicators that financial analysts use to forecast bankruptcies and potential slowdowns. In Monday’s newsletter we extensively talked about bankruptcy risks in Europe, but let’s dive in and understand how concrete these risks really are.

By corporate spreads we mean the difference in corporate bonds’ interest rates between the riskiest corporate bonds traded on the market (triple C and lower grades) and the safest (triple A bonds). The wider the spread, the more is the perceived corporate bankruptcy risk in the market, as investors start to sell riskier bonds and purchase safer ones.

In the Eurozone, the corporate spread hovers slightly above 18%, while in the US the same spread is less than 9%. A difference of 9 percentage points has been the largest since the recession of 2009, casting a bad omen over the Eurozone’s economic outlook.

Many financial experts believe that this is a further indicator that points towards the successful “soft landing” in the US and a recession in the Eurozone.

However, due to the globalized economy in which we live in, it is most likely that a financial slowdown in one of these two major financial poles might cause, or at least jump start, a similar phenomenon in the other one.

Do you believe that against all expectations the ECB will be able to achieve a soft landing?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

Finally, after many weeks characterized by an exceptionally bullish, but overpriced, performance, the stock market has shown some signs of weakness.

Today, the market started to move higher throughout the first hours of the session but then, all of a sudden, it drastically and rapidly jumped down, closing the day at -1.47%.

This move broke the “invincibility” character that the stock market had recently adopted thanks to the dovish Fed’s announcements. Additionally, it showed that even if there are only 10 days until the end of the year, the market could close a lot lower if it really tried.

On the other side of the capital markets, debt securities’ yields have started moving higher following the drop in the market. The 10 year US government bond rose +0.34%, potentially setting the stepping stone for the next yield rally.

Do you think that by the end of the year we will have a significant drop in equities, or that this move down is just a matter of a couple of days?

Answer

TThe correct answer is d) $3.9 per pound.

Currently the copper’s price per pound hovers just above $3.9, almost 9% below its all-time high set at the beginning of the year.

However, it is important to note that the current price is the result of an exceptional performance over the last two months where the price rallied over 9.5%!

Howl-Worthy Memes 😂

🐺 See you next time!

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