Equity Markets – Asia down across the board in the overnight session as Chinese indices took a hit over continuing inflation and the likely central bank response that could slow growth in the economy following the latest reserve rate hike…European indices are at or near their lows for the session as the DSK arrest throws French politics into an uproar (DSK was reportedly going to run for President of France in upcoming elections)…domestic futures indicate a lower opening
European Credit Markets - The big news over the weekend, at least around here, was the arrest of Dominique Strauss-Kahn (DSK)…personally, I expected the PIG spreads to widen on this news as it could draw attention to IMF activities if DSK’s character (which has been questioned before) is dragged out into the public view in an unfavorable light. Well, I was wrong. Spreads are in this morning and the SOVX Index continues its march back toward the +160 level which would once again be a “buy protection” signal on the index. It is interesting to me that Portugal and Spain are tighter and the news wires have been populated with stories about the Greek debt situation while the bailout for Portugal isn’t even complete. The order, in my estimation, of the market’s concern should be 1. Portugal bailout; 2. Ireland – give them a break on rates paid on the bailout funds; 3. Greece – new funds in concert with additional loan terms and some form of debt restructuring…an “opt-in” Brady bond-type deal? Bottom line, Greece should be able to last until early next year with the bailout funds they received last year this time and the market’s fixation is just additional proof that this is more about the banking system in France and Germany than about the bailout of Portugal. Here’s another interesting conclusion that I draw from the data…let’s create the 30:60:90 delineation. You’ve got the PIG countries with credit spreads currently above 90% of their all time wide (ATW) mark. Then you have the next “marginal” group of credits that we’ll call the BIFS (Belgium, Italy, France & Spain) they’re all around 60% of their ATW. Finally, you have everyone else which is basically northern Europe + the UK and they’re around 30% of their ATW spread on a weighted average basis. Not much attention has been focused on this currently but my guess is that there’s a battle brewing over who will succeed JCT as head of the ECB in the fall of this year…right now it looks like another BIFS entry (Draghi from Italy) but I’m unconvinced. The longer it takes to get a Portugal bailout done the more contentious all of this becomes.
Oil Markets – the Libyan Prime Minister met with the UN special envoy to Libya yesterday and said that the government was ready to cooperate with the UN but there is still no cease-fire…in Yemen, opposition groups have declared that the original deal for President Saleh to step down is now “dead” but that they are willing to meet with the secretary-general of the GCC to explore new options…8 are reported dead in the latest Syrian government / Syrian protester confrontation near the border with Lebanon…yesterday there was a mass border crossing (illegally) into Israel from Lebanon and Syria by hundreds of Palestinian refugees who were either fleeing the Syrian conflict or attempting to breach the Israeli border in protest on the anniversary of the return of the Jewish state back in 1948. Evidently both Israeli and Lebanese security forces opened fire on the refugees in an effort to turn them back. The casualty list remains unclear at this time…bottom line, the MEAN remains a cauldron of potential oil market volatility but for the time being, it’s taking a backseat to fears of weakening global growth and the latest iteration of the EU sovereign debt crisis.
• The arrest of DSK @ JFK has dominated at least the local headlines…it appears that there will likely be a battle for the job of head of the IMF which since WWII has gone to a European while an American heads the World Bank…it is expected that the emerging markets countries will push for their own candidate to get the chair after Lipsky leaves in August (previously announced decision)…the problem for the EM countries is coming to a consensus to get behind a single candidate. The bottom line is that any internal fighting that removes the focus from getting the EU sovereign crisis under control is not a welcome change at this point.
• Euro risk…the common currency is starting to show cracks around the edges of its 11 ½ month run since bottoming late last spring on the heels of the initial debt crisis. A sell-off here remains indicative of the “risk off” trade coming back into vogue but I don’t really see that reflected in the EU credit markets at the moment…of course the volatility surrounding the political situation is made worse by the arrest of DSK and the potential for a loss of focus at the IMF. We’ll see where the Euro trades today…it hasn’t touched the 100-day MA since February.
• Holders of German sovereign debt are becoming concerned that the political situation in the EU may result in something akin to joint and several liability and so they’re starting to sell German paper driving the cost of long term debt above that of the US for the first time since 2009. Much of this follows Merkel’s €142 billion plan to aid Greece and Ireland. Finance ministers will meet today to discuss next steps in an attempt to control this 2nd wave of sovereign debt crisis in Greece.
• In more news from the EU, it appears that the Zapatero-led government will likely lose out in the elections to be held on Sunday (22nd)…roughly 60% of the country will vote and the fear is that a loss by Zapatero could derail the austerity plan and fuel to the growing EU debt conflagration.
• Flooding along the Mississippi is throwing farming long the river in Louisiana into turmoil and threatens further food price inflation here and abroad
• Earnings releases – light day with only 3 S&P companies announcing (Lowe’s Hardware (LOW), Urban Outfitters (URBN) and JC Penney (JCP))…LOW missed by 2 cents (0.34 vs. 0.36)…JCP is estimated to come in at 0.24/share and URBN at 0.24/share as well.
• Macro news releases – again a light day…we get the Empire manufacturing index (looking for 19.65 down from 21.7 last month)…tomorrow is a bigger macro news day with housing starts and permits for April as well as industrial production and capacity…
Phillip Pennell, CFA
Turnberry Capital Management
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