Response To The "No Eurobond" Announcement - "The Theme Of The Market Being "Broken" Continues To Play Out"

From Peter Tchir of TF Market Advisors

Europe is shaking off yesterday's seemingly disappointing Merkel/Sarkozy press conference.  I can't find anyone who is particularly bullish about it, but the moves in the hedge products have to be respected.  XOVER is 26 tighter, back to 584.  Main is 7 tighter at 139, and even SOVX is 5 tighter with Spain and Italy leading the charge.  That is in spite of relatively neutral moves in the bond markets.  It seems like Europe must have had bigger and larger hedges than I realized.  The pain in trading books there is palpable today.  Bonds are getting marked marginally tighter, index shorts are getting marked a LOT tighter.  Investors are scrambling to get on side, and are using to the move in indices as an excuse to shift to "risk on" mode.  

The theme of the market being "broken" continues to play out.  This time market is gapping tighter on what if anything, seemed like a disappointing announcement - No Eurobond, No new increase in EFSF, and Yes a new tax.  BAC CDS is already at least 20 bps tighter this morning.  Anothing shining example of a crowded (and possibly longer term correct) trade getting squeezed. 

Gold is doing well again.  It is not getting dragged down in spite of the shift in mentality.  I have to believe that is because everyone is becoming more convinced the only way out of this crisis is to print money. 

Nothing has particularly changed in the past few days, if anything, data has been weak and Europe is running out of bailout willpower, but this move is too strong to ignore.  With limited data due out today or even tomorrow, the rally could continue.  The market has also now grown scared of missing the Jackson Hole rally.  It seems that we are constantly afraid of missing the next rally, only to be disappointed, but c'est la vie.  Maybe one more grind higher is what the market needs to suck everyone fully back, to set up for the next downleg.  It is shocking how quickly the market seems to be forgetting the fear of last week when SPX was heading to 1100. 


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