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Gary Smith’s Market Take

Here’s my take on the markets today, June 29, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly improving today. The 3M EUR/USD Cross-Currency Basis Swap is rising +9.3% to -53.50 bps. The 2Y Swap Spread is falling -6.5% to 23.56 bps. The European Investment Grade CDS Index is falling -6.5% to 166.24 bps. The European Financial Sector CDS Index is falling -9.8% to 260.94 bps. The France sovereign cds is down -4.5% to 189.25 bps. The Spain sovereign cds is falling -9.5% to 533.62 bps. The Italy sovereign cds is down -10.1% to 484.76 bps. The Spain 10Y Yld is down -8.8% to 6.33%(still up +1.25% in 5 days). The Italian/German 10Y Yld Spread is down -9.9% to 421.57 bps(still up +1.2% in 5 days). The Brazil sovereign cds is down -4.0% to 155.78 bps(still up +3.4% in 5 days). However, the Libor-OIS Spread is up +.4% to 28.5 bps and the Japan sovereign cds is up +1.8% to 94.8 bps. The Germany sovereign cds is underperforming, falling just -.9% to 103.0 bps(up +2.8% in 5 days). The China Development Bank Corp CDS has risen +8.1% in 5 days to 212.6 bps. Overall, credit gauge improvement today is meaningful, but gauges still remain at stressed levels. As well, while Spanish yields are falling substantially, they are still in the danger zone.

Major Asian indices rose around +1.5% overnight, led by a 2.6% gain in India. Shanghai rose +1.35%, but is still down -1.6% for the week. Major European indices are soaring around +4.5%, led by a +6.6% gain in Italy. The Bloomberg European Bank/Financial Services Index is jumping +4.4%(still down -.2% this week).

Tech and Homebuilders are leading today’s stock rally. Copper and Oil are seeing big 4%+ bounces today. However, Lumber is sitting out today’s large commodity rally, as it continues to trade very poorly given the bullishness sentiment towards Homebuilders, rising just +.1%. As well, the FIBER US Scrap Steel Index is dropping -12.5% today, the biggest decline since 2008. The 10Y Yld is bouncing +7 bps to 1.65%, which isn’t as much as I would have expected given the large equity advance.

While Europe appears to have kicked-the-can again, I suspect investor euphoria will be fairly short-lived. The plans will do little to boost economic growth in the region. Massive tax hikes and spending cuts are still yet to hit in several key countries that are already in recession. Lack of competitiveness has not been addressed. It is unclear whether or not Germany has really agreed to anything that changes the situation substantially. Still developing problems in key emerging market economies are also a big concern. I continue to believe, as I have been warning for a few weeks, that the upcoming earnings season will prove more challenging due to the big dollar rise and precipitous declines in some key economies during the quarter. Finally, the uncertainty over the implementation of Obamacare, the US election and the US fiscal cliff will also become a much bigger focus for investors as the year progresses. I covered some of my index trading hedges this morning and I am positioned 75% net long.

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Look ma, another rescue

So, another b.s. "solution" to the problem and another big b.s. rally on the so called fix.  What an embarrassment....


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