US Equities Ignoring US Sovereign Risk Warning

Tyler Durden's picture

We have been warning of the pending fiscal cliff in the US and the somewhat inevitable debt ceiling debacle, election uncertainty, and the question of Fed independence in an election year as potential catalysts for risk flares in the US and abroad. For now, US equities are happy to ignore these events, still drawn in their Pavlovian-educated manner to US equities for their nominal enrichment. The trouble is - there are clear warning signs from some particularly noteworthy markets that all is not well (that appear more capable of comprehending fundamentals). Forget for a moment the overnight plunge and recovery in futures as this will bring only anchoring bias; a step back to 30,000 feet and we note that the spread on USA Sovereign CDS has risen by over 30% in the last month (now back at 40bps or 3-month wides) flashing a worrying warning signal for US equities if the past is any guide. Remember that US CDS are denominated in EUR and do not simply reflect the 'default' risk of the fiat-issuing USA but the devaluation or restructuring risks - and it appears market participants are getting nervous once again of the profligacy of the US government and the ineptitude of the central banks with their one-trick-pony experimentation. At the same time, central banks' broad repression has crushed volatility in every asset class - except, as Morgan Stanley notes - credit which is inferring considerably higher chance of a risk flare in the short-term. So while this week will bring cheers of growthiness and cooperation and decoupling, the all-seeing eye of credit markets remain far less sanguine.

US Sovereign CDS is flashing a warning signal for stocks...

and credit markets are gearing up for more volatility ahead (even as the rest of the retail-driven global markets remain as sanguine as can be)...

just what do these other markets think will happen when Twist's end is discounted? Deja-Vu all over again.


Source: Morgan Stanley