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Gary Smith’s Market Take

Here’s my take on the markets today, May 9, 2012. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating meaningfully today. The FRA-OIS Spread is surging +10.0% to 42.82 bps. The 2Y Swap Spread is rising +7.6% to 33.4 bps. The TED Spread is rising +1.6% to 38.0 bps. The 3M EUR/USD Cross-Currency Basis Swap is falling -2.6% to -48.2 bps. The European Investment Grade CDS Index is rising +3.9% to 156.50 bps. The European Financial Sector CDS Index is rising +4.2% to 266.83 bps. The Germany sovereign cds is gaining +5.4% to 90.12 bps. The France sovereign cds is rising +4.3% to 211.75 bps. The Spain sovereign cds is gaining +4.0% to 518.50 bps(testing all-time high). The Portugal sovereign cds is rising +4.9% to 1,110.10 bps. The Russia sovereign cds is gaining +5.8% to 209.19 bps. The Italian/German 10Y Yld Spread is rising +4.5% to 408.78 bps. Overall, recent credit gauge deterioration is a big worry with a number of key sovereign cds breaking out technically.

Major Asian indices fell around -1.25% overnight, led lower by a -1.7% decline in China. The Nikkei fell another -1.5% and is down -11.0% in about 6 weeks, closing slightly below its 200-day ma. Major European indices are falling around -.75%, led lower by a -2.8% decline in Spain. Spain is now just 109 points away from its March 9th, 2009 low and down -20.5% ytd. The Bloomberg European Bank/Financial Services Index is down -2.0% today and down -19.0% since March 19th.

The weekly MBA Home Purchase Apps Index rose +3.4% this week, but remains stuck in the same range it has been in since May 2010 despite an improving labor market and record low mortgage rates. The 10Y T-Note continues to trade too well, copper trades poorly and the euro currency is breaking down technically. Oil is testing its 200-day ma again. While it will likely bounce off this level short-term, I expect it to move still lower over the coming months.

US stocks remain extraordinarily resilient with aggressive buyers appearing once again into a morning swoon. Tech/Retail are leading the rally off the morning lows with financials lagging. I continue to believe overall US investor complacency regarding the rapidly deteriorating situation in Europe is fairly high. However, the total put/call is a high 1.20 today. I am watching (XLF) closely to gauge whether or not this morning’s rally gains traction into the afternoon. I covered some of my index trading hedges into the morning swoon and I am positioned 75% net long.

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