Here’s my take on the markets today, July 30, 2012. If you’d like to read more of my articles, click here.
Credit gauges are mostly improving today. The 2Y Swap Spread is falling -6.9% to 19.84 bps. The European Investment Grade CDS Index is falling -3.6% to 156.96 bps. The European Financial Sector CDS Index is falling -5.8% to 252.28 bps. The Germany sovereign cds is down -4.3% to 70.0 bps. The France sovereign cds is down -2.3% to 159.50 bps. The Italy sovereign cds is down -2.3% to 484.74 bps. The Spain sovereign cds is down -3.3% to 532.08 bps. The Spain 10Y Yld is falling -2.0% to 6.61%. The Japan sovereign cds is down -4.3% to 91.94 bps and the Russia sovereign cds is falling -4.2% to 177.75 bps. However, the Libor-OIS Spread is rising +1.3% to 30.5 bps. The 3M EUR/USD Cross-Currency Basis Swap is falling -9.3% to -45.40 bps. The TED Spread is rising +.9% to 34.83 bps. The Italian/German 10Y Yld Spread is rising +2.1% to 465.24 bps and the Italy 10Y Yld is gaining +1.2% to 6.03%. Credit gauges continue to mostly improve in hopes of another European can-kicking, but remain at stressed levels.
Major Asian indices were mostly higher overnight, led by a +1.8% gain in India. However, the Shanghai Composite continues to sit out the global equity rally as it fell another -.9%. This index is now down -4.1% ytd and sits at its lowest level since March 2009, which is a big red flag for global investors. Major European indices are surging today, led by a +2.7% gain in Italian shares. The European Bank/Financial Services Index is jumping +3.0% today. Brazilian equities are falling -.5%.
The 10Y T-Note still trades too well, with the yield falling -4 bps to 1.51%. The benchmark China Iron/Ore Spot Index is falling another -.9% today and is down -6.8% in 5 days(-36.4% since 9/7/12). There were more hawkish comments from Chinese officials over the weekend regarding their real estate bubble and the China Iron & Steel Association reported inventory at 76 key steelmakers now totals 12.5m tons versus 11.8m tons in early July. As well, despite their recent bounces off the lows, the euro, copper and lumber all continue to trade poorly given equity investor perceptions that global central bank stimuli will boost economic growth in the near future. The UBS/Bloomberg Ag Spot Index is jumping another +1.9% today and is up +27.5% in about 2 months. I still believe that full QE is not as likely as investors expect. However, if the Fed does decide to go this route again, I expect the eventual economic ramifications to be even more negative than the second round proved to be.
In further evidence that the Fed’s ZIRP is pushing institutional investors too far out on the risk spectrum, subprime auto lending is soaring. Moreover, auto stocks trade very poorly given this fact and the current economic “recovery”, which is a red flag for the health of the industry longer-term. It remains unclear to me whether or not Germany will put its own balance sheet on the line to save the euro even as investors appear to be pricing this outcome into stocks. Tech shares, which had been leading, are a bit heavy today. I have not traded and I am still positioned 50% net long.
Related posts:
