Market Reaction To Global Bailout, Sovereigns Disappoint

Risk markets are tearing higher globally with equities, commodities, and credit all considerably higher. Equities and CONTEXT are back in line as this is a very systemic shift up as the dollar tanks and TSY yield surge. US equities are back to 11/18 levels but are stalling out a little here as the initial spike wears off - whether this liquidity surge fixes the insolvency crisis is the question it seems markets are considering now that they have had some time to think (and squeeze). We do note that while sovereign spreads in Europe are narrower, the moves are not dramatic and in some cases are actually deteriorating still.

Broad risk assets and ES (e-mini S&P futures) are back in sync after CONTEXT pulled back to equity's slow drip weaker overnight. Now the central banks have dumped liquidity, risk-on was evident but the move is perhaps notably small if this really is a solution - albeit extremely painful for shorts. The initial jump earlier on China's RRR shift was then taken on as the rest of the central banks joined in the party.

The dollar immediately dropped like a stone -1.5% on the week with AUD (carry and China driven) smashing over 5% higher against the USD. The EUR is (as usual) tracking with DXY as its main driver and we note that JPY did strengthen against the USD but is only marginally better on the week now.

Of course, the dollar shift and risk-on sentiment has surged commodities with Copper the major outperformer. Silver and Gold also jumped notably (with the former much more than the latter as is its higher beta case) and Oil now over $101 which has to help spending and demand in the real economy right?

Equity and credit have come back together as it seems equity had the sniff of this earlier in the week while credit remained less sanguine until now. The move admittedly is only back to levels from 10 trading days back and credit spreads remain hugely wider relative to any sense of normality.

Sovereign spreads over the last couple of days are not exactly responding in a hugely positive manner. Portugal still leaking wider and Italy not really much better at all.

And while TSY yields spiked higher, they are pulling back now off those spike highs and 2s10s30s also dragged higher - helping to drive the broad risk asset basket.

All-in-all, it is too early to judge this as anything other than a knee-jerk reaction. The reaction of bank spreads is positive but only modestly - not a solution. The reaction in sovereign spreads is minimal - not a solution. Of course equities are tearing as they only know one thing. Gold and Silver are up on fiat worries as liquidity surges, but Copper's surge seems a little overdone given the demand drag of Oil and the uncertainty of liquidity transmission to any real economy growth that AUD and Copper seem to be implying.

Charts: Bloomberg


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