Gary Smith’s Market Take for February 2, 2025

Credit gauges are mixed today. The 3M EUR/USD Cross-Currency Basis Swap is rising +5.75% to -69.25 bps(back to early-Aug. level). The TED Spread is falling -2.4% to 46.9 bps(back to mid-Nov. level). The 2Y Swap Spread is falling -3.9% to 26.0 bps(back to late-Aug. level). The European Investment Grade CDS Index is falling -1.9% to 123.95 bps(back to mid-Aug. level). The Portugal sovereign cds is falling -2.7% to 1,337.72 bps(still near all-time high and up +23.7% last 2 weeks). However, the Libor-OIS Spread is rising +.64% to 43.1 bps(back to early-Dec. level). The 2Y Euro Swap Spread is rising +.72% to 93.59 bps(back to early-Nov. level). The Spain sovereign cds is rising +.8% to 357.50 bps, the Italy sovereign cds is rising +1.0% to 396.25 bps and the UK sovereign cds is gaining +1.7% to 78.37 bps. Overall, credit gauges continue to improve, but are still at stressed levels.Major Asian indices rose around +1.0% overnight, led by a +2.0% gain in Hong Kong shares. I think investors have gotten a bit carried away with stocks in the region as slowing growth and stubbornly high inflation remain significant issues. Major European indices are up around +.5%, led by a .87% gain in Spanish shares. The Bloomberg European Bank/Financial Services index is up +1.1%. Investors continue to price in a European debt crisis “can-kicking” and a stabilization/improvement in economic activity in the region. While this optimism could last awhile longer, I still expect further economic contraction as more austerity measures take hold over the intermediate-term.

The AAII % Bulls fell to 43.81. while the % Bears rose to 25.08 this week. Overall, investor sentiment gauges are still registering too much complacency given the macro backdrop.

The 10-year yield is down another -1 bps to 1.82%, which remains a concern. Oil trades very poorly given the many recent potential upside catalysts. I suspect crude can move down into the low $80s/bbl, given current fundamentals, unless supply disruption worries intensify again. I remain long SCO. Several key market-leading stocks have stalled of late. I still believe that a more cautious approach is warranted in the short-term given that several key investor sentiment gauges are registering too much complacency, stocks are technically extended, global growth is still slowing and some market-leaders are stalling. I added to my trading hedges this morning and I am positioned 50% net long.