Here’s my take on the markets today, July 12th, 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 falling -14.2% to -11.0 bps. The FRA-OIS Spread is jumping +7.9% to 23.2 bps. The 2Y Euro Swap Spread is surging +6.5% to 43.67 bps. The North America Investment Grade CDS Index is up +2.1% to 78.66 bps. The European Investment Grade CDS Index is gaining +1.8% to 107.63 bps. The European Financial Sector CDS Index is rising +2.6% to 158.64 bps. The Spain sovereign cds is gaining +1.5% to 281.16 bps. The Italy sovereign cds is rising +3.1% to 276.70 bps. The Italian/German 10Y Yld Spread is rising +2.8% to 292.32 bps(+9.4% in 5 days). The Portugal sovereign cds is soaring +14.3% to 556.32 bps(+16.6% in 5 days). The Asia-Pacific Sovereign CDS Index is rising +.9% to 111.15 bps. The Japan sovereign cds is rising +1.45% to 68.11 bps. The Indonesia sovereign cds is gaining +2.9% to 212.5 bps. Overall, gauges of credit are mixed on the week, however, the surge in the Italian/German yld spread is a noteworthy red flag.
Major Asian indices were mixed overnight as a +1.4% gain in India was offset by a -1.6% loss in China(-10.1% ytd). Major European indices were mostly lower today, led down by a -2.3% decline in Spain. Spain(-.3%) and Italy(-.7%) are both down for the week despite the strong global equity rally. The Bloomberg European Bank/Financial Services Index is -.14%. Brazil is falling -1.7% and still trades very poorly(-24.7% ytd).
The euro is pulling back today to its 50/200-day ma after a large 2-day surge. I suspect it will give up more of those gains next week. The yen is still trying to form a bottom, but is pulling back -.5% today. Oil is rising another +1.4% and still trades well after breaking out of its intermediate-term range. It is now approaching the upper end of the range its has been in since May 2011 despite rising supply and decelerating demand. Copper is falling -.7% and still doesn’t trade that well despite recent gains. The China benchmark Iron-Ore Spot Index is rising +1.3%. Gold is pulling back -.4%, but is trading better of late. The UBS-Bloomberg Ag Spot Index is falling -1.6% and still trades poorly. Lumber is rising -.4%, but is trading better of late. The 10Y T-Note still isn’t trading very well, with the yield rising +2 bps to 2.59%, considering diminished tapering fears and decelerating global growth.
The major averages are choppy today on light volume after recent gains. Investors are once again ignoring significant and mounting negatives as bullish sentiment reaches frothy levels. Given the perception that weak earnings are already priced into stock prices, the action in (UPS) is another red flag. I suspect the days of p/e multiple expansion on the back of central bank hopes are numbered. Recent news from Portugal/Spain, sovereign downgrades and the upcoming European elections seem to have the potential to reignite their debt crisis over the coming months. Any further meaningful surge in oil will likely become a significant headwind very quickly for an already weakening global economy. Finally, the news out of key emerging markets becomes more concerning by the day. I still don’t believe that the global economy can continue to weaken without eventually impacting major US multinationals’ stock prices in a meaningful way.
Biotech, Bank, Disk Drive, Telecom and Airline shares are strong today, while Coal, Metals/Mining, HMO, Homebuilding and Education stocks are weak. Most stocks are technically extended heading into next week and tech shares seem especially vulnerable to a pullback on earnings given their recent sharp gains with global economic growth slowing, pc/tablet/smart phone sales slowing and currency headwinds. I added to my index trading hedges today and I am positioned 50% net long.
