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Gary Smith’s Market Take

Here’s my take on the markets today, March 27th, 2013. If you’d like to read more of my articles, click here.

Credit gauges are deteriorating today. The FRA-OIS Spread is jumping +4.3% to 25.20 bps(+8.1% in 5 days). The 3M EUR/USD Cross-Currency Basis Swap is falling -5.0% to -21.17 bps(-9.2% in 5 days). The European Investment Grade CDS Index is gaining +5.1% to 128.96 bps(+8.4% in 5 days). The European Financial Sector CDS Index is surging +5.2% to 199.75 bps(+18.7% in 5 days). The Spain sovereign cds is jumping +7.5% to 300.99 bps. The Italy sovereign cds is gaining +7.1% to 302.97 bps. The Italian/German 10Y Yld Spread is jumping +8.8% to 350.90 bps. The Asia-Pacific Sovereign CDS Index is gaining +.5% to 94.94 bps(+13.5% in 5 days). The China Development Bank Corp cds is gaining +2.6% to 95.13 bps(+13.3% in 5 days). The Brazil sovereign cds is rising +2.8% to 141.25 bps. 

MarketTakePicMajor Asian indices were higher overnight, led by a +.85% gain in Australia. Major European indices are lower, led down by a -1.1% decline in Spain(-6.1% in 5 days). The Bloomberg European Bank/Financial Services Index is down -.5%(-4.2% in 5 days). Brazil is +.8% higher on the day, but is still down -7.9% ytd.

The euro continues to trade poorly, falling another -.7% as it breaks convincingly below its 200-day.  The Citi Eurozone Economic Surprise Index has plunged -55.3 points in 5 days to -3.5. Oil is reversing +.3% higher. Copper is also reversing +.3% higher, but still trades very poorly. The benchmark China Iron-Ore Spot Index is gaining +.22%. Gold is rising +.5%, but still doesn’t trade well given recent events in Europe. Lumber is falling -.7% and is right at its 50-day. The UBS-Bloomberg Ag Spot Index is +.2% and still trades poorly. The 10Y T-Note continues to trade very well, with the yield dropping -6 bps to 1.85%, which remains a big red flag. 

The major averages are attempting their usual intraday v-bottom patterns on aggressive dip-buying after any morning swoon. Investor complacency regarding the deteriorating situation in Europe remains high even as many of the signs that preceded prior spikes in debt angst and US stock weakness are beginning to appear. According to Bloomberg, the spread between the VIX and the VVIX is the highest in six years, which indicates traders are anticipating a breakout in the VIX. Rising credit stress in Italy/Spain is especially concerning. As well, the plunge in the Citi Eurozone Economic Surprise Index indicates that the real economies of the region are rolling over faster, which is taking most economists by surprise.

Coal, Oil Service, Gold & Silver and Biotech stocks are relatively strong today, while Gaming, Bank and Telecom stocks are weak. I will closely monitor technical action early next week to gauge how much end-of-the-quarter window-dressing has been propping up the major averages through this recent spate of bad news. I am still positioned 50% net long.

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