Market Recap: 11.24.2010
With Korean and European assets stabilizing, yesterday’s fear-fuelled selloff in US equities reversed entirely. The short-covering bid however wasn’t enough to get SPX back above 1200 or its 21d (1198.5 cash). Still, that stocks have recovered all of yesterday’s losses is impressive in the context of the selloff in fixed income and renewed tensions in funding markets. SPX closes up 18 at 1198. The NASDAQ closes up 48 at 2543. The DOW closes up 151 at 11187.
The VIX closed down -1.10 at 19.54, back below 20 for the second day this week.
InFX, the focus was on the EUR on the back of the increasing fears over European funding. For those interested we are happy to expand on this dynamic on the phone. The basic idea here is that the cross currency basis (the cost of borrowing USD in EUR terms) is beginning to widen as USD funding markets become less liquid. As a result, European institutions financing USD assets are seeing their margins squeezed. Taken to the logical extreme, there could come a point (this happened at the end of 2008) where it is simply too expensive to continue to borrow in the forwards market. If that happens, these institutions need to source the USD somewhere else. Plan A is probably to sell euros to fund the assets. Plan B is even scarier as it probably means starting to sell the assets. Stay tuned as the equity and fixed income markets seem to be severely discounting either of these possibilities.
Funding concerns out of the European financial sector started the USrates marketoff with wider spreads in the front end, with 2y swap spreads 4bp wider versus 10y swap spreads unchanged. 3m LIBOR fixed higher for the first time in months at 0.2875%, with tomorrow’s LIBOR expected to fix up another .75bp to 0.295%. Despite these concerns, the credit fears were limited to the swap spread market and the overall level of rates actually sold off by 16bp in intermediates. This was driven by four factors: 1) marginally better economic data coming from a big drop in the weekly jobless claims and big upward revisions to offset this month’s decline in the durable goods report, 2) the 3rdof 3 Treasury auctions this week with $29B 7s tailing by 1.5bp, 3) convexity hedgers coming in to pay in swaps in the back up and 4) the lack of risk appetite of the dealer community to increase balance sheet ahead of the Thanksgiving holiday. Flows were mixed with better buying of options to express both long and short directional views, and generally light activity from the real money community.
It was a fairly light day for commodities. We saw continued real money long-rolling of grains as grains rose on Chinese import expectations. The energy complex had the most notable move of the day, despite the bearish crude numbers, with Gasoline the best performer, up +4%. Flow-wise, we saw some leveraged selling of crude as it jumped over 3% today.
Credit rallied on light flows today, helped by shorts locking in profits before the weekend. IG closed at 93.5, 2 bps tighter, and HY finished at 99.625, up 0.375 bps.
Tomorrow brings a very light calendar as the US celebrates Thanksgiving Day. Overnight we have trade balance for Japan and GDP for the Philippines.
Further EUR weakness was observed on Wednesday and the attention turned to other peripheral states in the Eurozone that may be in need of a future bailout. So much so that the touted speculators have pushed the yield on the Spanish 10y government bond to above the key 5.00% mark. Still, the assault on the EUR came in spite of a much stronger German IFO reading which showed that morale in the country was at its highest since the unification. The move lower saw the pair briefly move below the key 50DMA at 1.3298 which now opens the door towards the psychologically key 1.3000 level. Also worth noting that S&P ratings agency downgraded Ireland's sovereign credit rating by 2-notches to AA- and it is widely expected that Moody’s and Fitch will follow suit in the coming days. There is little in terms of economic data on Thursday and as such the price action will continue to driven by the news related to the sovereign crisis.
The pair finished the session little changed on Wednesday and recovered some of yesterday’s losses following geopolitical tensions in the Korean peninsula. Going forward there is a risk that GBP may decline against the greenback and fail to post substantial gains against the EUR until EU policy makers come up with a viable plan to stop the contagion from spreading to Portugal and Spain. In terms of technical levels, to the downside support levels are seen at the 61.8% Fibonacci retracement level at 1.5607, followed by 1.5500 and 1.5345. Also of note was today’s preliminary GDP data which showed that the UK grew by 0.8% in the July to September period and 2.8% on a Y/Y basis, which underpinned the view that there is no need for the BoE to undertake any asset purchases at this juncture.
The pair finished the session in slight positive territory on Wednesday after somewhat promising economic data from the US raised the demand for riskier assets. The move higher saw the pair test 83.50 level on several occasions but the pair failed to break the key resistance level largely because of an absence of positive news from Japan. In terms of price action going forward, given the Thanks Giving holiday in the US on Thursday, the price action is expected to be very subdued and thin on the liquidity side. Finally, technical studies show that an Ichimoku cloud bottom is seen at 83.51, while the cloud top is seen at 83.56.
From Goldman Sachs and Talking Forex