Here’s my take on the markets today, July 26th, 2013. If you’d like to read more of my articles, click here.
Credit gauges are mixed today. The 3M EUR/USD Cross-Currency Basis Swap is rising +6.4% to -8.81 bps. The North America Investment Grade CDS Index is falling -2.0% to 75.06 bps. The European Investment Grade CDS Index is falling -1.2% to 102.12 bps. The UK sovereign cds is down -1.9% to 37.6 bps. The Japan sovereign cds is down -5.5% to 64.46 bps. The China sovereign cds is falling -2.8% to 108.38 bps(+10.8% in 5 days). The South Korea sovereign cds is down -4.3% to 84.67 bps(+5.2% in 5 days). However, the 3M Euribor-OIS Spread is gaining +6.4% to 11.7 bps. The 2Y Euro Swap Spread is rising +3.4% to 40.49 bps. The Emerging Markets CDS Index is gaining another +4.0% to 302.86 bps(+8.7% in 5 days). The Russia sovereign cds is gaining +.89% to 178.08 bps(+7.7% in 5 days). The Brazil sovereign cds is rising +3.5% to 184.62 bps(+11.3% in 5 days). Overall, credit gauges are mixed this week with European credit showing improvement and Emerging Markets’ credit deteriorating again.
Major Asian indices were mostly lower overnight, led down by a -3.0% decline in Japan. Major European indices are mixed with a +.9% gain in Spain offsetting a -.7% decline in Germany. The Bloomberg European Bank/Financial Services Index is rising +.05%. Brazil is rising +.3%.
The euro is falling -.07%, but is trading better of late. The yen is surging +1.0% and is now above its 50-day ma. Oil is falling -.93% and looks weaker in the short-run. Copper is falling -2.6% and still trades poorly. The benchmark China Iron-Ore Spot Index is rising +.38%. Gold is falling -.7% and is consolidating recent gains at its downward-sloping 50-day. Lumber is rising +.25%. The UBS-Bloomberg Ag Spot Index is falling -.12% and still trades very poorly. The 10Y T-Note still doesn’t trade very well with the yield flat at 2.56%.
The major averages are seeing the usual intra-day v lows after any opening swoon as the buy every small dip mentality becomes further entrenched, which is resulting in an unhealthy level of investor complacency again. The 4-wk avg. of the AAII % Bears is the lowest since Feb. 2012 at 21.5. As well, Bloomberg said today that the implied volatility for options on the Chicago Board Options Exchange Volatility Index has dropped 37% to 48.4, the lowest since May 2008, according to data complied by Bloomberg on three-month contracts with an exercise price near the gauge. The consensus view appears to be that Europe’s economy is improving materially which will help boost US earnings and gdp significantly in 3Q. While Europe’s economic activity is likely bouncing off the lows, a substantial sustained improvement anytime soon is unlikely, in my opinion. Moreover, the fundamental issues plaguing key emerging markets are as problematic as ever, in my opinion. Emerging markets credit diverged meaningfully from equity this week. Finally, the US budget debate looks set to get ugly again this fall with uncertainty over the Fed’s intentions still fairly elevated.
Coal, Restaurant and Airline stocks are strong today, while Oil Service, Alt Energy, I-Banking, HMO, Tech, Education, Construction and Paper shares are weak. In the short-run, stocks still appear to “want to go higher”. However, I still expect meaningful weakness to resurface again over the coming weeks. I am still positioned 75% net long.
