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Gary Smith’s Market Take

Here’s my take on the markets today, May 21, 2012. If you’d like to read more of my articles, click here.

Credit Gauges are mixed today. The FRA-OIS Spread is falling -5.1% to 45.45 bps. The 2Y Swap Spread is falling -2.9% to 35.66 bps. The 3M EUR/USD Cross Currency Basis Swap is rising +1.9% to -51.57 bps. The European Financial Sector CDS Index is falling -2.0% to 302.17 bps. The Italian/German 10Y Yld Spread is falling -1.1% to 433.30 bps. However, the TED Spread is rising +2.6% to 40.1 bps. The Western European Sovereign CDS Index is gaining +1.5% to 315,85 bps. The Spain sovereign cds is gaining +.84% to 560.0 bps. The UK sovereign cds is gaining +1.8% to 75.17 bps. The Ireland sovereign cds is gaining +2.1% to 721.87 bps(+14.7% in 5 days). The Portugal sovereign cds is rising +1.3% to 1,236.56 bps(+12.2% in 5 days). The Japan sovereign cds is gaining +1.3% to 110.92 bps. The US sovereign cds is jumping +4.5% to 46.50 bps(+12.9% in 5 days). The Emerging Markets Sovereign CDS Index is surging +4.1% to 332.75 bps. Overall, credit gauges are still giving back too much of their early year improvement and remain at stressed levels.

Major Asian indices were mostly higher, led by a +.94% gain in South Korea. Despite more China stimulus speculation, Hong Kong fell another -.16% and is down -4.1% in 5 days(-10.7% in less than 3 weeks). Major European indices are mixed as a +1.1% gain in Germany is being offset by a -.6% decline in Spain. Spain is now down -4.1% in 5 days and down -23.8% ytd, which remains a huge red flag for the broad market as the index is unable to even bounce. The Bloomberg European Bank/Financial Services Index is rising +1.1% today, but is still down -5.8% in 5 days(-23.9% in about 2 months).

While the weak post-ipo performance of (FB) is damaging to investor psychology, (JPM) concerns are likely much more important. (JPM) continues to trade very poorly amid rising worries about the risks the bank has taken on over the last few years.

US stocks are bouncing after last week’s outsized losses, however the quality of the rally is lacking so far. There are few big-volume/gainers and the devastated commodity-related stocks are leading. The 10Y T-Note isn’t selling off at all and the euro can’t sustain a bounce. However, tech stocks are trading well given (FB) weakness. As I speculated last week, it appears as though a portion of market-leader (AAPL)’s recent losses were directly related to the (FB) IPO. While stocks were very oversold and may bounce further in the shot-term, there is still too much uncertainty on the horizon to conclude a durable low is in place, in my opinion. I covered some of my index trading hedges this morning and I am positioned 75% net long.

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