Sovereign Risk Begins To Tick Up As Banana Equities Continue Following Fundamentals Inversely
Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer.
What it means practically is anyone's guess, although if sovereign risk seems to be returning to something reminiscent of normality, look for equities to not be far behind as they attempt to shed their "banana" moniker some day soon.
Update: Belgium 8 bps wider to 44 on Dexia news.