Deterioration in the credit markets increases the probability of lower prices ahead with a cautious stance toward equities warranted as financial stress remains elevated.
Junk bond credit default swap spreads (red line, bottom panel) are blowing out to their highest levels since 2012. Investment grade CDS (blue line, bottom panel) are also rising:
The deterioration in junk bonds is most evident in the energy sector (Energy Junk Index down 10% YTD, blue line below) but other areas have been rolling over as well with nearly 50% of the sectors showing negative returns YTD:
Money market spreads continue to rise without any improvement:
The TED spread is also trading at levels last seen in 2011-2012:
The BOFA global risk index exceeded its August highs today and stress levels remain elevated (positive readings indicate above average levels of stress):
Looking at financial conditions globally the region showing the most stress is Asia with their financial conditions index (red line) just coming off a -2 standard deviation event. Europe is worsening despite continued liquidity support from the ECB QE program as their index is at -0.603 and below its levels in August (blue line). One encouraging sign is the US index is at -0.307 and well off the lows in August, but still in negative territory:
For a greater explanation of the credit markets and how they can be used as a leading indicator for stock market behavior, click here.
