From Peter Tchir of TF Market Advisors
The Wall Of Worry Just Got Bigger
Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday.
It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative. It seems like the market is hopeful for a big announcement out of the Merkel/Sarkozy meeting today. I really don't see how Eurobonds are feasible. Any meaningful issuance would mean that these 2 countries would have to pay more for their own debt, in order to subsidize other countries, and may even be obligated to pay back money that went to other countries. I wrote more about that yesterday, and in spite of more people mentioning that it's a possibility, I remain convinced it cannot be implemented in a meaningful way any time soon (next few years). If we rally on any soundbite regarding Eurobonds or Supersized EFSF, I would fade those rallies quickly. Since I'm already short, guess it means getting shorter if I don't cover any prior to the press conference.
Italian and Spanish bond yields remain stable. In fact all yields on sovereign debt remain eerily stable. Eye of the hurricane? It feels like investors are just tired of fighting manipulated sovereign debt markets, so I'm not going to view the stability as positive as I would otherwise. BAC CDS is back to 320. Nowhere near its wides of last week, but a definite sign that nervousness still exists at the bank level, and I don't think we will find a real bottom until the banks manage to convince investors they are rock solid or we purge the weakest ones globally.