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Gary Smith’s Marklet Take

Here’s my take on the markets today, August 20th, 2013. If you’d like to read more of my articles, click here.

Credit gauges are mostly deteriorating again today. The North American Investment Grade CDS Index is down -2.6% to 82.04 bps(+9.0% in 5 days). The Brazil sovereign cds is down -2.2% to 204.35 bps(+15.3% in 5 days). The Indonesia sovereign cds is falling -5.9% to 261.5 bps(+27.8% in 5 days). However, the 3M EUR/USD Cross-Currency Basis Swap is down -3.3% to -9.36 bps. The TED Spread is gaining +1.8% to 23.17 bps. The Western European Sovereign CDS Index is up +1.8% to 83.5 bps. The European Financial Sector CDS Index is gaining +.5% to 146.24 bps(+9.0% in 5 days). The German sovereign cds is jumping +5.1% to 28.0 bps. The Spain sovereign cds is up +1.7% to 232.06 bps. The Italian/German 10Y Yld Spread is gaining +3.45% to 246.64 bps. The Asia-Pacific Sovereign CDS Index is rising +3.3% to 126.91 bps(+18.3% in 5 days). The Japan sovereign cds is up +1.6% to 65.3 bps(+8.0% in 5 days). The China sovereign cds is jumping +4.7% to 116.78 bps(+16.2% in 5 days). The State Bank of India cds is rising another +5.2% to 371.85 bps(+24.0% in 5 days). The Russia sovereign cds is up +3.0% to 201.35 bps(+9.4% in 5 days). Overall, credit gauges are deteriorating too much for equity investor comfort of late(especially those in emerging markets).

Major Asian indices were sharply lower overnight, led down by a -2.6% decline in Japan. Major European indices are lower, led down by a -1.8% decline in Spain. The Bloomberg European Bank/Financial Services Index is falling -1.5%. Brazil is falling -1.7%.

The euro is rising +.6% today, breaking above its June high, as it remains at the upper-end of its intermediate-term range. They yen is rising +.25% and continues to base after its rapid decline. The Emerging Markets Currency VIX is down -.45% today, but has jumped +11.0% over the last five days. Oil is falling -1.6% today despite euro strength, mideast unrest and equity strength. Copper is flat today and is stalling near the upper end of the range it has been in since April. The benchmark China Iron-Ore Spot Index is falling -.14%. Gold is rising +.47% and has traded well over the last six weeks. Lumber is rising +.1% today and still trades poorly. The UBS-Bloomberg Ag Spot Index is falling -1.3% today and still trades very poorly. The 10Y T-Note still trades poorly despite the -6 bp drop in yld today to 2.82%.

The major averages are rebounding today on the pullback in long-term rates and some retail earnings optimism. Despite recent losses, the ‘buy the dip mentality” is still very much entrenched. Equity investor complacency remains at unhealthy levels, in my opinion, as gauges of angst and overall market volume are more subdued than during prior pullbacks over the last few years. I still believe the magnitude of the headwinds emanating from emerging market economies remains underestimated. As well, China’s 7-day repo rate is starting to move up too much again, with the yield rising +9.6% over the last 5 days to 4.45%. The Citi Latin America Economic Surprise Index looks to be rolling over again, falling -24 points today to -100.3. The odds are higher than perceived that we are in the early stages of a full-blown emerging markets debt/currency crisis. The mideast continues to unravel at an alarming rate. I still believe the Fed has backed itself into a corner and will taper this fall. However, if the Fed indicates over the coming weeks an imminent taper is not in the offing I expect a vigorous short-term bounce in equities, followed by more stock weakness into the fall as long-term rates fail to respond in the expected manner and emerging market economies continue to deteriorate. In my opinion, the extent to which global central banks are currently creating very damaging long-term dislocations should be very clear from recent global market turbulence on just a hint at a subsiding in the flood of liquidity they are providing.

Homebuilding, REIT, Precious Metal, Coal, Retail and Airline shares are strong today, while Ag, Steel, Networking and Medical shares are relatively weak. Tech stocks, in general are lagging(MS Tech +.27%). I covered some of my index trading hedges this morning and already put them back in place. I am still positioned 25% net long.

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