From Peter Tchir of TF Market Advisors
Stock Futures Up A Touch, But European Credit Very Weak
European CDS is wider across the board. SOVX is 203 which is 4 wider on the day, and liquidity seems to have broken down completely as I'm seeing 3 bp bid/offer spreads rather than the more customary 2 bps. That is after it widened 10 bps yesterday. Fins at 163 (+4 on day) and Fin Subs 279 (+12 on the day) are also trading extremely poorly. Fin Subs, although fairly illiquid deserve special mention. They were 15 wider yesterday and although it is hard to tell with the rolls, it looks like they are almost at the widest levels of last March at the height of the first time the market noticed the sovereign debt crisis.
The sovereign bond market looks to be in rough shape as well. Greek 10 year bonds are back below 54 on a price basis (16.35% yield). They have given up most of the late May gains. It rallied on the comments that the EU wanted a plan to bailout Greece again. It is fading on the fact that in spite of wanting a plan, it seems very difficult to come up with a workable plan.
The curve is inverting even more as far as I can tell, though traded volume seems very low, and quotes are getting hard to come by from my seat.
Portuguese and Irish bonds are also out significantly with Portugal 10 year bonds piercing 10% for the first time ever. No matter what happens with Greece, the market will quickly be able to focus on Ireland and Portugal.
Texas Instruments originally spooked the market after the close, but Obama rode to the rescue with some leaks that he is discussing Employer Payroll Tax breaks. Did the U.S. just jump the shark officially? We are, legally, writing IOU's to provide IOU's to some public pension funds to remain below our debt ceiling. We have competing 'plans' to reduce the amount of future deficits - not actual surpluses, just less additional deficit - but those deals see most of the benefits far down the road. We could barely come up with any cuts to get the budget passed earlier this year, but allegedly everyone is on board with cutting future deficits in order to raise the debt limit. We continue to preach austerity to other countries who are struggling worse than us. But on the first weak employment report (let's not count the April Household report), signs from ISM that growth is slowing, but there is still growth, we have to provide stimulus? This is like breaking your new year's resolutions 4 minutes after waking up on New Year's day. You were basically only able to stick to your New Year's resolutions from the time you passed out after singing auld lang syne to the time it took you to walk to the kitchen. Stocks can rally on this, we may even see some support for stimulus, but it seems any credibility we hoped to get from budget reduction posturing has to be shot. Even the poor evil rating agencies must be squirming this morning. Can they really just ignore this sort of behavior?
U.S. credit looks like it is trying to open a little better with stock futures, but is already under pressure. HYG and JNK were lower yesterday, with HYG basically moving 1:1 with the stock market. Both of these funds saw shares outstanding decrease, albeit minimally, yesterday, continuing that trend. Nothing has changed my view that the credit market are still at risk of further decline and that at this point, the bonds themselves will perform in line with, or underperform, the CDX indices.