Something I noticed today is the relationship between the $BKX (US bank index) and $JNK (Barclays High Yield Corporate Debt index, or ‘junk’) and also the technical structure of $BKX. 

See chart:

$BKX in red, $JNK in blue.

Obviously the bank index and an institution grade product will have certain price correlations (since banks and funds are likely to hold junk bonds more than retail investors and so during the credit crisis, defaults were high and so they followed the bank index), but what is most notable is that that the correlation has become much more strongly positive through 2015 – 2016 (note the tightening of the price lines compared to 2009 – 2014). I’m not a corporate debt expert. But with certain macroeconomic issues still very much working in the background, many lower rated firms may find themselves being unable to commit to their debt refinancing obligations over the next few years, especially firms in the energy and mining sectors. This will lead to major liquidity issues in the banking sector, which then leads me onto a technical aspect of the chart. 

I’ve outlined a perfect example of a bearish flag. A consistent upward sloping channel coming off of a bearish move. With European banks possibly facing a crisis (which has been a bit quiet recently) and new Basel III liquidity regulations coming in 2019 (might be too late), what’s not to say US banks aren’t going to face another crisis? We’re already seeing issues to do with sovereign debt coming back to annoy the ECB with Greece facing problems again, while Brazil & other Latin American countries facing big issues and China facing huge internal debt issues & an overheating housing market (another story I won’t go into now). In my opinion, I don’t think we are far away from another crisis, although I’d hate to be a naysayer.