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Gary Smith’s Market Take

Here’s my take on the markets today, November 14th, 2012. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating today. The Germany  sovereign cds is down -3.1% to 31.5 bps and the Italy sovereign cds is down -1.1% to 306.67 bps. However, the 3M EUR/USD Cross-Currency Basis Swap is falling -4.3% to -30.5 bps(-13.5% in 5 days). The FRA-OIS Spread is rising +3.5% to 21.7 bps(+12.1% in 5 days). The 2Y Swap Spread is gaining +5.6% to 14.25 bps(+21.6% in 5 days). The Western Europe Sovereign CDS Index is jumping +6.7% to 124.34 bps(+10.4% in 5 days). The France sovereign cds is rising +.5% to 90.9 bps(+8.6% in 5 days). The Portugal sovereign cds is gaining +1.0% to 641.0 bps(+7.8% in 5 days). The Hungary sovereign cds is gaining +2.4% to 313.80 bps(+9.0% in 5 days). The Asia Pacific Sovereign CDS Index is gaining +2.6% to 95.4 bps. The China sovereign cds is gaining +1.2% to 72.0 bps(+7.3% in 5 days). The Japan sovereign cds is rising +2.3% to 71.25 bps. The Brazil sovereign cds is up +1.55% to 109.37 bps. The Israel sovereign cds is up +3.5% to 160.5 bps(+8.8% in 5 days). Key credit gauges are beginning to deteriorate too much and overall gauges remain at stressed levels. 

Major Asian indices were mostly lower overnight, led down by a -.9% decline in India, which broke convincingly below its 50-day moving average. The Shanghai Comp fell another -.8%, is testing a multi-year low and is now down -8.4% ytd despite investor perceptions that the Chinese economy is rebounding. The Nikkei jumped another +2.2% on continued optimism over an impending leadership change that investors believe will lead to unlimited monetary stimulus that will finally boost economic growth. The Nikkei is very risky at current levels versus most other developed markets, in my opinion.  Major European indices are lower, weighed down by a -2.0% decline in Italy. The Bloomberg European Bank/Financial Services Index is falling -1.8%. Brazil continues to trade very poorly and is falling -1.6% today. The Citi Latin America Economic Surprise index is falling rapidly, down another -10.7 points today to -16.5 points.

The euro is falling -.3% and continues to trade poorly. Oil is rising +1.6%, but still trades poorly given all of the potential upside catalysts. As well, Copper is down -.4% and still trades poorly. The benchmark China Iron-Ore Spot Index is unch. today. Lumber is gaining +.71% and still trades pretty well. The UBS-Bloomberg Ag Spot Index is falling -.3%. Gold is reversing slightly higher and is likely near a tradable low. The 10Y T-Note still trades too well, is ignoring today’s stock rally off the lows and is breaking out of the range it has been in of late.

Last night the China Securities Journal reported that many Chinese cities are readying a new property tax trial for the beginning of next year. As well, a NDRC researcher wrote in a commentary that the economy has not bottomed out, fundamentals have not improved and that the Sept. recovery was only a “short-term fluctuation in a downward trend.”

The Mid-East continues to unravel at an alarming rate. Israel is calling up 75,000 reservists today and closing the main roads around Gaza. Egypt’s involvement will likely prove a large negative for the situation. 

Stocks are reversing off morning lows on optimism over a potential US fiscal cliff “solution”. If European politicians are any guide, the conciliatory rhetoric is an attempt to buy time in the markets with disappointment likely forthcoming after Thanksgiving. I remain skeptical anything other than a can-kicking or small deal will materialize before year-end, which will still leave significant uncertainty for investors, consumers and businesses. Moreover, any of the likely solutions will weigh on an economy that is already near stall speed, which will then curtail US demand for European goods further, thus raising the odds of more sovereign downgrades and a deepening recession in the region. Angst over France, which I have been cautioning about, is already on the rise in a meaningful way.

Apple Inc.(AAPL) is attempting to make a key reversal today on volume and has likely made a meaningful low. However, I wouldn’t be surprised to see a test of this low over the coming weeks on more US fiscal cliff disappointment and rising global growth fears. Long AAPL. Biotech, Homebuilding and Gaming stocks are strong today, while Airline, Tech and Steel shares are relatively weak. I covered some of my index trading hedges this morning and I am positioned 50% net long.

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