Today’s New Twist

So today, MAIN and SOVX, European CDS indices waited for US stocks to open before moving to their tightest levels on the day.  So in a completely bizarro world, the markets that are most directly affected by this weekends statements and actions have a muted reaction, until the US stock market, with market least directly affected, opens with a bang.  Maybe it makes sense, but the correlations seem all wrong.  More likely, US stocks are just the happiest place out there and some investors who short the SPX into the close on Friday with all the negative headlines are being forced out, and have decided to sell some CDS indices in addition to covering shorts in stocks.

I am going to bet that the initial reaction in Europe was the right one.  Mildly positive but at risk of giving up the gains, and that the US reaction that all is good, is once again wrong.

Italian and Spanish and Belgium bonds are tightening versus French bond yields, but this is not the good type of tightening.  French 10 year bonds are out 7 bps on the day.  The fact that the other countries are seeing their yields increase should be more of concern than their illusory “tightening” versus France.  All but Spain are actually widening versus Germany after this weekend’s announcements, which makes sense, as France’s participation in the Dexia situation, has further weakened their credit relative to Germany.