Daily Commentary

MarketMinder’s View: After a number of high-profile debates over whether they should pay out in recent years, big changes could be coming to the credit-default swap (CDS) market. CDS are essentially insurance contracts designed to compensate holders in the event a bond issuer defaults. When a bond issuer misses payments, it is declared in default and a committee at the International Swaps and Derivatives Association (ISDA) meets to determine whether the insurance should trigger. But in recent years, critics have noted the committee’s determinations have been quite uneven, with the clear default of Credit Suisse’s subordinated bonds last year not triggering CDS and Russian sovereign CDS sitting in limbo tied to sanctions. This article documents potential changes to the panel’s structure, arguing there is a conflict of interest presently as people with financial interests in CDS make the determinations. An independent review found this was probably not ideal, so a “market-wide” consultation is now underway to solicit feedback on possible changes. No way to know how this goes, but it is worth watching, in our view. Lastly, it is worth noting that this market is realistically not even as large as depicted here. While it cites that the value is down to “$3.8 trillion, well below the $33 trillion it was worth in its pre-financial crisis heyday,” these figures are gross notional value. Many CDS contracts offset, a lesson learned after 2008. Hence, the figures are likely even smaller than that. Some, including S&P, think the net notional figure—the more correct metric—is roughly $1.5 trillion. If the ISDA doesn’t make changes that add transparency, though, it could shrink even more. After all, why have insurance if it doesn’t pay out when needed?

MarketMinder’s View: Ahead of next month’s Belgian elections, this article offers a portrait of Tom Van Grieken, head of the Flanders secessionist party and current poll leader, Vlaams Belang. Of course, please note that MarketMinder favors no politician nor any political party in America or Europe, assessing developments solely for their potential economic or market impact. Vlaams Belang reminds us of a cross between Geert Wilders’ VVD in Holland (with its strong anti-immigration stance) and Junts in Catalonia, given its push for independence based on Flanders’ economic might. Such parties often stir uncertainty when they poll well, and it seems that is underway in Belgium, too. While Van Grieken argues there is a path toward starting Flanders’ secession at the regional level (should Vlaams Belang win sufficient seats), this article shows you clearly why there is little to fear at the national level: “Vlaams Belang, for the first time in its controversial history, is predicted to win the highest percentage of votes in Belgium—over 27%. This would make it the largest party in the Belgian Parliament—yet well short of a majority. … Already the two parties with the most and third-most seats—the nationalist New Flemish Alliance, or N-VA, which seeks gradual independence for Flanders, and the more radical Vlaams Belang itself—are excluded from government. Every government must include at least one Flemish and one French party, and the French parties all observe a strict cordon sanitaire against Vlaams Belang.” Even if the party does do well at the regional level, we suspect any attempt to force an independence referendum would face similar hurdles as Catalonia’s, which didn’t end with a split country.

MarketMinder’s View: While April’s headline producer price index of final demand (PPI) did rise a faster-than-expected 0.5% m/m (consensus was for 0.3%), there are some mitigating factors that we think are worth considering. As this article notes, this follows a marked downward revision to March—from 0.2% m/m to -0.1%. When you take the two together, the index level is right around where analysts expected. Also, some of the components that feed into the Fed’s targeted headline personal consumption expenditures price index were cooler: Namely, airfares fell -3.8% m/m, while health care rose 0.2%, matching March’s pace, although outpatient care fell -0.1%, per the Bureau of Labor Statistics. All of this suggests takeaways from the PPI report are pretty limited. So you can go ahead and ignore the tortured analysis of what this means for potential September Fed rate cuts in here, which even traders seem to have done, given it swayed a volatile metric by only 4 percentage points (from a 64% chance of September cuts to 60%).