It’s An Upside Down World…Or So Much For “Decoupling”

Italy has “successful” bond auction and for all intents and purposes, JPM misses earnings.

Stocks failed to respond to a “successful” Italian bond auction.  The market isn’t giving them much credit for placing bonds that mostly mature in the timeframe covered by LTRO.  The auction results are good, but the market is taking a wait and see attitude towards them as everyone is fully aware of how much LTRO money is out there, that Italian banks in particular issued bonds to themselves to get financing and are “indebted” to the government and ECB (in more ways than one).

JPM’s earnings may be enough (or not enough as the case may be) to end the rally in financials.  The numbers were not great and no matter what the official analyst numbers were, everyone was set up for them to beat.  Weak earnings in trading does not bode well for other banks.  It was a decent quarter for the markets (with volumes and volatility far higher than what we have seen so far this year), and JPM is big in the US new issue market, so has a competitive advantage, so their performance is concerning.  DVA give back was about 30% of what they had taken as a gain in Q3.

I think Morgan Stanley in particular is exposed as I doubt they did significantly better than JPM in investment banking, they had a settlement with MBIA that will show up as a big hit (spun as one time, even though the associated earnings were never spun as one time) and they have a much larger DVA give-back.

So as European sovereign debt shows signs of stability (manipulated stability, but stability nonetheless) the US is disappointing on earnings. With the “decoupling” trade so prominent, the US markets are set up to be very weak relative to Europe.  This is second day in a row where the decoupling thesis is taking a beating (yesterday’s economic data was weak).