10/08/2011: Was US markets panic behind Irish banks shares crash?

I've just crunched through some interesting data on VIX and Irish Financials index IFIN and there are some interesting results.

To remind you - VIX is in effect a market-based metric of risk in the US markets.

The main premise advanced by the proponents of the argument that US financial crisis drove Irish financial crisis is that panics in the US have caused irrationally pessimistic revaluations of the Irish financial equities and thus led to the collapse of the banks shares in H2 2007- H2 2009.

To assess this, I divided daily data from VIX and IFIN into three periods. Pre-crisis period covers data from January 2000 through July 2007. Financial crisis period covers data from August 2007 through December 2009, while Sovereign crisis period runs from January 2010 through today.

Given the nature of data, VIX data for intraday spreads is only available since September 2003.

Table below summarizes core stats on the data:
Several features worth highlighting in the above:

• IFIN data shows declining positive skew over the evolution of the crises, while VIX shows growing positive skew. This suggests that rising US risk aversion (VIX) was becoming structural over time as crises progressed from financials to sovereigns, while Irish financials were moving from positively skewed distribution in the pre-crisis period (positive non-risk premium to Irish financials) to progressively smaller positive skew in the crises periods. This is not consistent with the risk spillover from the US to Ireland story.
• Intraday variation in Irish financials remains smaller than in VIX, but shows qualitatively similar dynamics to VIX. However, increase in intraday variation during the crises is much stronger in the Irish financials than in VIX, which again suggests that risk pricing in the US markets had little to do with Irish financials risk-pricing. Notice that intraday spreads are highly non-normal in their distribution with third and fourth moments off the charts.
  
• 1-month dynamic correlations between VIX and IFIN remained negative across all periods (implying that rising US risk was associated with falling IFIN valuations), but relatively weak (at maximum mode of 0.35 on average). median correlations show a bit more dynamism during the crisis, rising from -0.41 in pre-crisis period to -0.51 during the Financial crisis period and declining to -0.45 in Sovereign crisis period. However, these are not dramatic either. In fact, positive skewness was reinforced during the Financial crisis period, while negative kurtosis declined in absolute value.

Chart above summarises the entire series of data, showing historically relatively weak, but negative (as expected) correlation between the values of Irish financial shares and the risk levels in the US markets.

Chart below breaks this down into three periods:
What's interesting in the above chart is that:

1. Correlation remains negative but explanatory power significantly declines in the period of Financial Crisis (so the picture is the opposite of the claim that the US 'panic' spilled over into Irish markets), while the slope remains relatively stable.
2. More interestingly, the relationship completely disappears since the onset of the Sovereign crisis. basically, once the IFIN hit 4,000 levels, there is no longer any meaningful connection between Irish financial shares prices and risk attitudes or perceptions in the US markets. Guess what - that magic number was reached around 29/09/2008.

Chart below plots 1mo dynamic correlations between VIX and IFIN
While correlations tend to stay, on average, in the negative territory, as the table above shows, they are not significantly large. In fact, overall during the Financial crisis period there were 318 instances of the correlation equal to or exceeding (in mode) 0.5 - or 51% of the time. In pre-crisis period this number was 42% and during the Sovereign crisis so far - 45%. But there is a slight problem in interpreting this 51% as the spillover effect from the US. During the Financial crisis period, pre-Lehman collapse, higher correlations took place 58% of the time, while post-Lehman collapse they took place 45% of the time. So overall, it appears that US risk attitudes (aka 'panics') were more related to adverse movements in IFIN before the Big Panic took place than during and after the Big Lehman's Panic set on.

Interestingly, there is also no evidence that changes/volatility in the US attitudes to risk had any significant serious impact (adverse or not) on volatlity Irish financial shares valuations, as shown in the chart below:
In no period in our data is there a strong relationship between changes (volatility) in US risk attitudes and the Irish financial shares valuations volatility.

A note of caution - these are simple tests. The data shows a number of problems that require serious econometric modeling, but overall, so far, there is no strong evidence to support the proposition that Irish banks shares or financial shares have been significantly and systematically adversely impacted by the US 'panic' or by 'Lehman collapse'. Our banks problems seem to be largely... our banks own problems...

08/08/2011: What VIX tells us about today's markets meltdown

Let's chart what I called the Roy Lichtenstein-styled "KABOOM" moment for the markets today. Recall that by definition the CBOE Volatility Index (VIX) is "a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility."

Now, basically, VIX is as close to a pure price risk bet as we have. Again per CBOE: reported VIX index values represent "market estimate of expected volatility that is calculated by using real-time S&P 500 Index (SPX) option bid/ask quotes. VIX uses near-term and next-term out-of-the money SPX options with at least 8 days left to expiration, and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index."

Now to the charts.

Starting from the top, we have actual VIX itself - today's close at 48.00 which was:

• Still well below the historical max of 80.86 attained on 20/11/2008
• Well ahead of the historical average of 20.35 or January-2008 to present average of 27.21 or the average since January 2010 of 21.11
• Today's close VIX reading was 63rd highest daily reading for the entire history of the series and the highest since January 2010
• All 64 top readings (equal or above that attained today) were recorded in the period since January 2008.
  

Today's intraday spread of 35.65% is below Friday intraday spread of 45.52. However, the two readings are quite extraordinary:

• Intraday spread average for historical series is 3.01%, while since January 2008 through present intraday spread averaged 9.06%.
• Today's spread was 7th highest in history of the series, the 5th highest since January 2008 and the second highest (after last Friday's) since January 2010.
• Friday's intraday spread was the 5th highest daily spread in the history of the series and the 4th highest since the crisis start (January 2008)

To see just how extraordinary last couple of days are, consider two time horizons for volatility in VIX itself:
and a shorter horizon:
3mo dynamic standard deviation for today's close is only 433rd highest reading in the series history and the 60th highest since January 2010, while 1mo dynamic standard deviation is the 56th highest over entire history and the 5th highest since January 2010.

However, in terms of daily percentage changes, today's rise of 50% is the fourth highest daily increase since the beginning of the VIX history and the highest since January 2008.

In terms of 1mo dynamic semi-variance (measuring only variance for the days of increasing VIX index, in other words - only for those days when risk rises), the last chart above clearly shows that we are in for a treat in these markets.

07/08/2011: Emergency G7 Summit - Policy Dilemma

My latest column in the Globe & Mail on the topic of G7 emergency summit: link here.

04/08/2011: Live Register for July 2011

Live Register data is out today for July.

Per CSO: "The standardised unemployment rate in July 2011 was 14.3%, up slightly from a rate of 14.2% in June. The monthly increase in the standardised unemployment rate was caused by an increase of 1,500 (+0.3%) in the seasonally adjusted number of persons signing on the Live Register. The latest seasonally adjusted unemployment rate from the QNHS was 14.0% in the first quarter of 2011."

Mapping this:
Again, quoting CSO: "Since May 2010 the seasonally adjusted Live Register total has remained within the range of 440,700 and 448,200, indicating that while there have been fluctuations, the overall trend in the Live Register has remained relatively flat over this period."
Of course, the statement above can be checked against a shorter-term horizon trend: year on year there has been an increase of 2,400 in seasonally adjusted LR or 0.54%. In June 2011 the same figure was 4,600 or +1.04%, suggesting that the July bounce up is rather shallow. 3mo moving average for current period is up 1.13% on previous period. This confirms CSO statement.

In July 2011 there were 470,284 people signing on the Live Register representing an increase of 3,460 (+0.7%) over the year. Adjusting for seasonality, total number of signees was 447,900 in July against 446,400 in June - a rise of 1,500 down from a previous monthly increase of 2,500.
Similarly in unadjusted terms, July increase was less than that recorded in June 2011 (+5,066 or +1.1%) and far less than the increase of 34,403 (+8.0%) seen in the year to July 2010.

CSO highlights that "On a seasonally adjusted basis there were monthly increases of 1,300 females and 300 males on the Live Register in July 2011. The number of female claimants increased by 6,150 (+3.7%), to 172,514 over the year while the number of male claimants decreased by 2,690 (-0.9%) to 297,770. This compares with increases of 15,280 (+10.1%) and 19,123 (+6.8%) for females and males respectively in the year to July 2010." Again, the trend is relatively clear here with later stages of unemployment driving up female signings to LR, while emigration is most likely driving male exists in the early stages of the process.

Another structural problem we face is that of long-term unemployment: "The number of long term claimants increased by 45,508 in the year to July 2011, bringing to 40.4% the proportion of claimants that have now been on the Live Register for one year or more. In July 2010 long term claimants made up 31.0% of the total Live Register."

The quality of employment is not improving either. "There were 85,865 casual and part-time workers on the Live Register in July, which represents 18.3% of the total Live Register. This compares with 16.9% one year earlier when there were 79,072 casual and part-time workers on the Live Register. In the year to July 2011 the number of casual and part-time workers increased by 6,793 (+8.6%), with the number of males increasing by 4,015 (+9.6%) and the
number of females increasing by 2,778 (+7.4%)."

• There were no notable changes in July patterns in terms of LR signees under- and over-25 years of age. Year on year, numbers of LR signees 25 years and older increased by 7,500 or 2.09%, while number of signees under 25 years of age has declined 5,100 or -5.86%.
• Numbers of casual and part-time workers rose seasonally adjusted 6,793 year on year in July (up 8.59%)
  

Per CSO analysis: "In July Irish nationals accounted for 83.1% (390,999) of the number of persons on the Live Register. Of the 79,285 non-Irish nationals, the largest constituent group
on the Live Register continued to be nationals from the EU15 to EU27 States (41,732), followed by the UK (19,006). In the year to July 2011 the number of Irish nationals on the Live Register increased by 3,387 (+0.9%), while the number of non-Irish nationals increased by 73 (+0.1%)."

04/08/2011: PMIs, Exports-led Recovery and Jobs - July 2011 data

Based on Manufacturing PMI (see detailed post here) and Services PMI (details here), let's chart Irish economy's progress on the road to the recovery.

First, consider the issues of employment and core PMIs:
So in terms of economic activity, we have moved:

• In Manufacturing from the recovery with mild jobs creation in January 2011 to both employment and output contractions in July 2011.
• In Services, a jobless recovery in January 2011 remains such in July with July reading showing accelerated joblessness and slower growth in output.

Summary of employment indices is extremely worrying at this stage:
Now, in terms of exports-led growth:
While exports performance continues to the upside in both Services and Manufacturing, in both sectors, exports growth is associated with declining employment, not rising. This is now an established trend with both June and July showing jobs declines amidst exports growth in both sectors, in contrast with May, when exports growth in both sectors supported fragile jobs creation.

So far, since January 2008, there were:

• 17 months of jobs-destruction associated exports increases in Services, against just 6 months where jobs creation was associated with exports growth
• 20 months of jobs destruction during coincident exports expansions in Manufacturing, against just one month when jobs creation underpinned exports growth.

Good luck to ya all who hope for an exports-led recovery to yield significant reductions in unemployment any time soon.

04/08/2011: Services PMI for Ireland - July 2011

NCB Economics released Services sector PMI for Ireland for July. I posted on latest data for Manufacturing PMI yesterday (here).

Unlike Manufacturing PMI, Services sector data points to continued expansion, albeit at a slower pace. Headline numbers are:

• Overall Services sector business activity stood at 51.7 (above 50, but not statistically significantly) in July, down from 52.4 in June. Year-to-date average is now at 52.1, against YTD 2010 average of 51.0 and well ahead of YTD average for 2009 of 36.8. 3mo average through July 2011 is 51.5, below 3mo average through April 2011 of 52.1. Hence, overall, disappointing result, but still remaining in the expansionary territory consistently since December 2010.
  
• New Business sub-index in July fell marginally to 49.2 from 49.4 in June, marking third consecutive month of below 50 readings. YTD 2011 average is now at 50.0 and marginally below 50.2 reading for January-July 2010, but well ahead of the abysmal 36.2 reading for the January-July 2009 average. 3mo average through July, however is firmly in the contraction zone at 48.9 against 3mo average through April at 51.9.

A more recent snapshot of data:
Other sub-indices also showed renewed weaknesses:

• Backlogs of work posted a sharp monthly decline from 44.5 in June to 43.9 in July, suggesting severe weaknesses in the short-term pipeline. The sub-index is now in the contraction territory for every month since July 2007.
• New export business crossed over into contraction territory for the first time since December 2010, with July reading of 49.6 from June reading of 53.1. Year-to-date average for 2011 is now at 53.7, dangerously close to 53.6 reading in the same period of 2010. Most recent 3-mo average is at 52.4, down from previous 3mo average of 54.6.
• Business expectations reading was the only one that posted positive change, rising from 60.3 in June to 62 in July - a high and strong reading for the indicator. However, 3mo average through July 2011 - at 61.5 - is still below 3mo reading through April 2011 (66.5).

On profitability side:

• Output prices signaled continued and deepening deflation at 42.3 in July from 43.5 in June, marking 4th consecutive month of dropping output prices.
• Input prices also eased in index reading, but remain at inflationary levels, with July reading of 50.6 down from June 51.8.
• So prices wedge acted to reduce further profit margins. Profitability sub-index of PMI has moved to 44.9 in July, marginally better than June 44.8, but still deeply below 50.
  

Derived index of profit margins in Manufacturing and Services - computed by me, based on NCB data - now show a slowdown in the rate of profit margins depletion in Manufacturing, but widening in Services:

• Profit margins index in Manufacturing in July stood at -15.01, down from -16.22 in June and well below 12 months average, the 3mo average and comparable readings for 2010.
• Profit margins index in Services had reached deeper into contraction territory with -16.40 reading in July against -16.02 reading in June. The 12mo average stands at -14.6.

So just as in the case of Manufacturing, Services PMI signals disappointing results for July 2011 and weak signals for forthcoming months.