Here’s my take on the markets today, August 14th, 2013. 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 +1.9% to -8.72 bps. The FRA-OIS is falling -1.56% to 20.8 bps. The Germany sovereign cds is down -2.1% to 25.66 bps. The Spain sovereign cds is down -2.5% to 222.82 bps. The Italian/German 10Y Yld Spread is falling -2.48% to 236.17 bps. However, the Western Europe Sovereign CDS Index is gaining +.6% to 82.5 bps. The UK Sovereign cds is up +.6% to 36.21 bps. The Japan sovereign cds is rising +2.1% to 61.72 bps. The Emerging Markets CDS Index is rising +2.66% to 300.97 bps. The Russia sovereign cds is up +1.4% to 186.51 bps. The Brazil sovereign cds is up +2.5% to 181.65 bps. The Egypt sovereign cds is rising +4.7% to 785.0 bps.
Major Asian indices were mostly higher overnight, led by a +1.3% gain in Japan. Major European indices are mostly higher today, led by a +.48% gain in Italy. The Bloomberg European Bank/Financial Services Index is rising +.62%. Brazil is gaining +.69% and is trading much better of late.
The euro is falling -.05% and remain stuck in an intermediate-term range. The yen is flat today and has pulled back to its upward-sloping 50-day. Oil is gaining +.6% and still trades well. Copper is rising +.5% and still trades pretty well. The benchmark China Iron-Ore Spot Index is rising +.71% back to levels last seen in March. Gold is gaining +.8% and is trading pretty well considering more Fed taper talk and rising economic optimism. Lumber is gaining +.47% and is also trading better of late. The UBS-Bloomberg Ag Spot Index is gaining +.7%, but still trades poorly. The 10Y T-Note is not trading well with the yld flat despite a triple-digit DJIA loss.
The usual aggressive buying after any opening swoon did not materialize today, which is a change in character. Overall, recent technical action is a bit concerning considering the surge in overseas stocks, more economic optimism and outsized gains in formerly beaten-up stocks. Breadth has deteriorated and former leading sectors are lagging badly. Investor complacency remains at unhealthy levels. Of particular concern, the weekly MBA Home Purchase Apps Index fell -5.4% this week and is all the way back down to the middle of the range it has been stuck in since May 2010. The Home Construction ETF(ITB) is down -19.3% since May 20th with its 50-day crossing below its 200-day today. Given how much of US housing activity has been dominated by investors and how much prices have risen already, I suspect the housing market is much more fragile than perceived. Moreover, conventional wisdom holds that interest rates are rising due to Fed taper worries. The Fed’s ability to suppress rates is overstated, in my opinion. It is more likely that the rate rise is a result of improving sentiment regarding emerging market and European economies. By waiting so long to act, the odds are rising that the Fed is getting backed into a corner in which rates rise even more if it doesn’t taper as expected. This possibility increases the likelihood that rates could temporarily rise to disruptive economic levels. Finally, I continue to believe the ongoing unraveling of the mid-east will eventually become a big problem for stocks if it results in another meaningful surge in oil prices from current levels.
Metals & Mining and Coal shares are strong today, while Homebuilding, HMO, Disk Drive, Semi, Alt Energy and Utility shares are weak. I added to my index trading hedges this morning and I am positioned 25% net long.
