Here’s my take on the markets today, May 4, 2012. If you’d like to read more of my articles, click here.
Credit gauges are mostly deteriorating today. The 3M EUR/USD Cross-Currency Basis Swap is rising +2.9% to -41.50 bps and the Italian/German 10Y Yld Spread is falling -.97% to 385.03 bps. However, the 2Y Swap Spread is rising +4.2% to 29.25 bps. The TED Spread is up +1.3% to 39.5 bps. The 3M Euribor-OIS Spread is gaining +1.2% to 38.4 bps. The European Investment Grade CDS Index is gaining +2.8% to 144.81 bps. The European Financial Sector CDS Index is up +2.0% to 244.52 bps. The Portugal sovereign cds is surging +4.2% to 1,012.22 bps, the UK sovereign cds is gaining +1.6% to 65.33 bps, the Brazil sovereign cds is gaining +2.3% to 122.75 bps and the US sovereign cds is up +1.4% to 40.1 bps(+44.0% in less than 2 weeks). Moreover, the North American Investment Grade CDS Index is jumping +3.1% to 99.08 bps. Overall, credit gauges continue to give back too much of their 1Q improvement and remain at stressed levels.
Major Asian indices were mostly lower overnight, led down by a -1.9% decline in India. The Sensex broke down technically, closed below its 200-day moving average and is down -9.1% since Feb. 22. Major European indices are falling -1.75%, led down by a -1.95% decline in Germany. Italy is down another -1.55% and is now down -18.8% since March 19. As well, Russia is plunging -4.1% on the decline in oil and is breaking down technically. The Bloomberg European Bank/Financial Services Index is down -.8% and is now down -17.0% since March 19. The Citi Eurozone Economic Surprise Index is falling another -6.9 points today to -34.7, which is the lowest since mid-November of last year. The recent intensification of the downturn in Eurozone economies raises the odds of further sovereign/bank downgrades over the coming weeks.
The 10Y T-Note continues to trade too well, copper continues to trade poorly and the euro has turned lower the last 3 days despite weaker US economic data. Oil is falling to the lower end of the range it has been trapped in for the last few months. I expect oil to fall another $10/bbl+ by the fall assuming no serious supply disruptions. Fitch is out warning today of a Eurozone breakup. As well, a senior official of the Greek Ministry of Finance is saying today that “Greece will exit from the Euro.” I continue to believe that the ECB’s LTRO plan will be viewed in a very negative light over the coming months and that the Eurozone will not exist in its current form over the intermediate-term. Given the upcoming US “fiscal cliff”, intensely negative political rhetoric and likely reigniting of the European debt crisis, more caution is warranted into the second half of the year. I added to my index trading hedges this morning and I am positioned 25% net long.