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Gary Smith’s Market Take

Here’s my take on the markets today, October 11th, 2013. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving again today. The 3M EUR/USD Cross-Currency Basis Swap is rising +8.3% to -7.73 bps. The TED Spread is declining -10.0% to 17.76 bps. The North America Investment Grade CDS Index is falling -1.6% to 77.27 bps. The US sovereign cds is falling -10.4% to 33.77 bps. The European Investment Grade CDS Index is falling -3.5% to 92.61 bps. The European Financial Sector CDS Index is falling -2.0% to 128.0 bps. The Western Europe Sovereign CDS Index is falling -7.6% to 72.31 bps. The Italian/German 10Y Yld Spread is falling -2.3% to 241.6 bps. The Emerging Markets Sovereign CDS Index is falling -2.0% to 221.19 bps. However, the FRA-OIS Spread is gaining +4.1% to 22.25 bps. The China sovereign cds is gaining +1.3% to 80.0 bps and the South Korea sovereign cds is up +2.5% to 67.66 bps. Overall, gauges of credit have improved meaningfully this week.

MarketTakePicAsian indices were higher overnight, led by a 1.7% gain in China. European stocks are higher today, as well, led by a +.9% gain in the UK. The Bloomberg European Bank/Financial Services Index is rising +.5% today. Brazil is gaining +.2%, but still doesn’t trade very well.

The euro is rising +.2% and is at the upper-end of its intermediate-term range. The yen is trading poorly again and is -.32% lower on the day. Oil is falling -.95% and is likely nearing a tradable low ahead of potential upside catalysts. Copper is rising +.7%, but still doesn’t trade that well. The benchmark China Iron-Ore Spot Index is gaining +.08%. Gold is falling -1.7% and is trading poorly again. Lumber is falling -1.5% and still trades poorly. The UBS-Bloomberg Ag Spot Index is down -.4% and still trades very poorly. The 10Y T-Note is trading too well given the recent equity surge, with the yield flat at 2.68%

The major averages are modestly higher today, which is a large positive given yesterday’s strong surge and lingering uncertainty regarding the shutdown/debt ceiling. While equity turbulence could temporarily resurface early next week on more back and forth, I suspect the lows for this pullback are in place as both sides’ pain thresholds appear to have been reached. Once another can-kicking has been agreed upon, equity investors will turn more towards fundamentals for a few weeks. Lower energy prices, lower long-term rates, no Fed tapering in sight and the ongoing perception that the global economy is improving should also help. Moreover, earnings estimates have been lowered and companies with misses will have the cover of the govt shutdown to hide behind. Finally, seasonality and year-end performance chasing will likely start to kick in over the coming weeks. While I am more concerned than ever about the intermediate/long-term for the economy and stocks prices, the major averages likely have further upside from current levels over the short-term.

Coal, Alt Energy, Paper, Internet, Computer Service, Airline, Gaming, Construction and Homebuilding stocks are strong today, while Oil Tanker, Precious Metal, Ag, Biotech, HMO and Retail stocks are relatively weak. I covered some of my index trading hedges this morning and I am positioned 75% net long.

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