Credit Vs Equity. Logical Vs Illogical?
Via Peter Tchir of TF Market Advisors,
S&P futures have moved more than 20 points since 3:30. The first big move was on the back of a story that Greece really will commit to the whatever the EU demands. The second move was after China re-pledged to invest in Europe. IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning. In Europe, Main is unchanged while stocks are up about 1% across the board. Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%.
A letter from Samaras is unlikely to sway the EU from their path of “orderly” default. Whether or not the EU makes the right noises today and finally releases the PSI details, the path is for “orderly” default (whatever that means). Greece is not prepared to default yet, but for first time, it seems like both sides are actually preparing for that eventuality rather than hoping beyond reason that the situation will work out. Stocks chose to rally on the news of the letter (credit did a bit too), but the reality is it isn’t enough to change the path which is default.
The China story doesn’t seem anything new. Hasn’t China pretty much always remained involved. I think every credit person understands that China will lend money to Germany, France, and the Netherlands. They are somewhat indifferent about lending it directly or lending it via unleveraged EFSF. That isn’t news and shouldn’t be treated as news. If China says they will lever up EFSF, or give money to banks, or even buy Italian and Spanish debt directly, then it is interesting and new. This other stuff is just noise and a headline that changes nothing, since it is what they have pretty much said all along.
The GDP data out of Europe is “encouraging”. It came in at -0.3% vs expectations of -0.4%. Hmmm…That is annualized, so the estimate for the quarter was -0.1% and the number was -0.08%. That seems like rounding error. And the 3rd quarter was revised down by 0.1%.
We get some data today. I expect it to be okay since things like industrial production should benefit from the good weather, but any miss will definitely surprise the market.
Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.