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Gary Smith’s Market Take

Here’s my take on the markets today, August 9th, 2013. If you’d like to read more of my articles, click here.

Credit gauges are mixed today. The 2Y Euro Swap Spread is down -3.2% to 39.75 bps. The Spain sovereign cds is down -1.9% to 231.66 bps. The Italy sovereign cds is down -.9% to 237.83 bps. The Japan sovereign cds is down -2.5% to 61.26 bps. The Emerging Markets CDS Index is down -2.5% to 296.74 bps. The South Korea sovereign cds is falling -2.5% to 77.5 bps. The Brazil sovereign cds is down -2.0% to 184.99 bps. The Russia sovereign cds is down -1.0% to 183.07 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -7.7% to -8.5 bps. The Western Europe Sovereign CDS Index is up +1.5% to 83.24 bps. The European Financial Sector CDS Index is gaining +.6% to 136.65 bps. The China Development Bank Corp. cds is rising +.4% to 151.24 bps(+11.8% in 5 days). The State Bank of India cds is rising +.3% to 269.84 bps(+6.1% in 5 days). Overall, credit gauges are mixed over the last week, however the Bloomberg Asia Financial Conditions Index(Bloomberg: BFCIAXJ Index) has fallen back down near its late-June lows despite the recent global equity rally and a significant rise in economic optimism for the region.

MarketTakePicMajor Asian were mostly higher overnight, led by a +.7% gain in Hong Kong. Major European indices are higher, led by a +.8% gain in the UK. The Bloomberg European Bank/Financial Services Index is rising +1.0%. Brazil is jumping +1.9% and is breaking above its downward-sloping 50-day.

The euro is falling -.34% and is near the upper end of its intermediate-term range. The yen(+.4%) is trading better of late. Oil is surging +2.1% despite talk of weak demand and increased production from Iraq. Copper is also trading better, rising another +1.2% today. Gold is flat and is right at its downward-sloping 50-day. Lumber is rising +.4%, but still trades very poorly. The UBS-Bloomberg Ag Spot Index is falling -.3% and also still trades very poorly. The 10Y T-Note is trading a bit better of late with the yield falling -1 bp today to 2.58%.

The normal v-low in stocks after opening weakness is occurring again today. Even on down days, stocks “feel like they want to go higher”. Investor complacency remains elevated with rising hopes for a second-half acceleration in the global economy. While China is likely temporarily stabilizing, I don’t believe a meaningful acceleration is underway. Moreover, any further spike in Chinese real estate prices will likely boost talk of tax hikes and more curbs. Despite all the pundit optimism, the Shanghai Comp still doesn’t trade very well. While Europe is likely also stabilizing, I still don’t see a recipe for a meaningful acceleration. I it also very likely that optimism for US growth will fade a bit over the coming weeks as economic data roll in that fully reflect the effects of the spike in mortgage rates/energy prices. Overall, it appears to me the global economy is just stabilizing after a meaningful deceleration, and is not accelerating like most investors seem to currently perceive. In my opinion, the Fed will still begin tapering before year-end even with some less optimistic data.

Coal, Metals & Mining, Homebuilding and REIT stocks are strong today, while Airline, Education, Gaming and Oil Service shares are weak. Breadth isn’t that bad for a down day. Heavily-shorted and beaten-up metal and coal stocks are soaring today(CLF, RIO, VALE, BHP, BTU, CNX, WLT, etc). These shares likely have further upside as long as “the global economy is improving” belief remains in tact. I added to my index trading hedges this morning and already covered some of them. I am still positioned 75% net long.

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