The T Report: Europe has its Parti Quebecois Moment
I have said and written that I expect to see more nationalism come into play as the crisis continues. I may have been a bit early, but we are seeing growing signs of it, with Marine le Pen’s strong showing in yesterday’s French election being the most obvious example. The Dutch Parliament’s failure to approve “austerity” is another sign of growing skepticism of a one size fits all Euro solution.
In Canada, the Parti Quebecois always did better in tough economic times. When times are good, people like to hang out, talk about vacations, what they bought, which was the best Habs team of all time, and why the current version of Les Canadiens is underachieving. In tough times, people are eager to hear why the problems are someone else’s fault. Good times are always a direct result of one’s own actions; whereas, bad times tend to be blamed on someone or something else. Now they can talk a bit about how things would be better if those someone’s or something’s would change, before moving on to the best Habs player of all time, and what the current team should change to be like the old teams.
Away from the election results, more economic data came out of Europe, and it is all bad. PMI missed. Spain is clearly in a recession. Bank stocks are getting hammered. The S&P futures are sitting just above 1,360. We tested the 1,358 level last week and had a strong bounce. The week before saw one sell-off get as low as 1,355 before bouncing. I think the combination of weak data, strange votes, and the realization that the firewall has no immediate impact will weigh on the market and we will break through and trade below 1,350 before we see another round of support.
AAPL is definitely a wildcard. It is the cheapest it has been in 40 days. Yes, that is the problem. The sell-off has been dramatic, but after a parabolic move higher, we are only back to prices last seen on March 14th. It was at $455 on February 1st. I will be watching this closely as it is so big in the indices that it could be the catalyst for a bounce, or the trigger for a bigger sell-off towards the 100 day moving average.
CDS indices are weak across the board. In Europe, MAIN is at 148.5, 5 wider on the day, and bid/offer spread is increasing as liquidity evaporates again. IG18 is relatively strong, only 2 bps wider at 102, but with fair value being at least 105, there is some room for this index to move wider. I think Europe was just scared to push futures below that 1,360 support, and if we break that this morning, IG can quickly move to 104 bid. If HYG or JNK opens anywhere within a ¼ or possibly a ½ point of Friday’s close, it is a good sale, as they are overbought, trading at a premium to NAV, and this latest round of weakness in Europe will put pressure on all the credit markets.
French bond yields are actually a little better on the day (somewhat surprising to me given the election results, but I guess they still capture some “flight to quality” bid, but they are not as strong as German bunds. Italian and Spanish 10 year bonds are both weak, hitting yields of 5.71% (+6 bps) and 5.96% (+3 bps) respectively. They have bounced off the lows, but I think we will see a capitulation move lower with Italy getting to 6.25% and Spain to 6.5% before any serious ECB intervention occurs.
Buy the dip has worked well, almost too well, so I am not going to do that. I believe we break this support level and see one more significant downward move before we see real support in any of the risk markets.