Here’s my take on the markets today, July 2, 2012. If you’d like to read more of my articles, click here.
Credit gauges are mostly improving today. The 3M EUR/USD Cross-Currency Basis Swap is rising +1.7% to -55.5 bps. The TED Spread is down -1.3% to 37.44 bps. The European Investment Grade CDS Index is down -3.1% to 160.75 bps. The European Financial Sector CDS Index is falling -4.3% to 250.0 bps. The Germany sovereign cds is down -4.8% to 97.25 bps. The France sovereign cds is down -3.4% to 182.37 bps. The Spain sovereign cds is down -5.9% to 499.75 bps. The Italy sovereign cds is down -4.5% to 465.6 bps. The Russia sovereign cds is down -4.8% to 219.49 bps. The Brazil sovereign cds is down -4.9% to 149.60 bps. However, the 2Y Swap Spread is jumping +6.8% to 25.63 bps(+13.0% in 5 days). The FRA/OIS Spread is gaining +3.9% to 34.62 bps(+6.2% in 5 days). The Spain 10Y Yld is rising +.44% to 6.36% and the Italian/German 10Y Yld Spread is gaining +.2% to 424.43 bps. While there is nice follow-through from Friday’s improvements, the gain in the 2Y Swap Spread bares close monitoring. Overall, gauges remain at stressed levels.
Major Asian indices were mostly higher, boosted by a .9% gain in Australia. Major European indices are higher, lifted by a +1.3% gain in France. The Bloomberg European Bank/Financial Services Index is rising +1.68%. Brazil is down -.46% today, has not participated in the recent global equity rally and is down -4.8% ytd. The Citi Latin America Economic Surprise Index is picking up downside steam, falling another -4.4 points today to -18.6, which is the weakest since mid-August of last year.
Given the many weak regional surveys, the market’s negative reaction to today’s ISM is somewhat surprising. The New Orders component of the index fell to 47.8 from 60.1. This was the weakest reading since April 2009 and the largest drop since right after the 9/11 attacks. The gauge of Export Orders was very weak too, falling from 53.5 to 47.5. Cyclicals are underperforming. Road & Rail shares are especially weak, falling -1.2%.
The euro currency is giving back too much of Friday’s gain. As well, the 10Y T-Note has recouped all of Friday’s loss. A handful of market-leading growth stocks are helping to mask broad market weakness today. There was quite a bit of negative commentary out of Germany over the weekend regarding Merkel’s perceived “cave”. I still think it is unclear whether or not Germany has really agreed to anything that significantly changes the intermediate-term dynamics of the debt crisis. Even if the apparent kick-the-can fools markets again for awhile, I still see little reason to be optimistic on the crisis longer-term as the economies of region weaken further. I added to my index trading hedges and I am positioned 50% net long.
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