Another day of European headline watching. Yesterday Merkel supposedly said that Eurobonds would never happen while she was alive made many people wonder if that was the last condition to be met. Other than putting the “ding dong” song from the Wizard of OZ in my head, the statement did little.
Tonight she is having a working dinner with Hollande in Paris. Somehow that is now a market headline. Rajoy said Spain couldn’t afford to fund at these rates for long – hardly shocking for a country that wants a program to give them lower rates.
I remain constructive that we in the process of seeing several steps taken to address the crisis. None solve it, but I said on Bloomberg last night, a combination of bank recapitalization, bank lending programs, and sovereign support programs that are generous rather than punitive would go a long way to stabilizing Europe and encouraging risk on. I am fearful that they won’t get their act together and am looking at fairly cheap vol to buy puts as a way to protect for disappointment. With quarter end and positive comments coming out of Europe I will let the position run for a bit before putting on the hedge.
One encouraging sign has been the relative stability of high yield. S&P realized vol has been spiking, and while not as high as just a couple weeks ago, is trending upwards, but HYG vol is much lower than it was in early June and isn’t rising. The more that credit can remain stable in the face of increased equity vol, the more convinced I am that there is a solid base from which to rally. Investors continue to demand yield and see U.S. high yield as a good asset class. I think the fact that the JP Morgan whale trade is barely in the headlines is a positive sign – both for credit and the markets.
We may get news on healthcare. I’m not sure what that does for the market as a whole. I can see individual stocks reacting positively and negatively, and it may send some signal to the market about the elections, but I just don’t see it being that meaningful relative to what is going on in Europe.
Banks came out with estimates on Facebook today. There was nothing horribly exciting about the estimates except for the fact that it looks like they waited until yesterday to see where the stock closed before filling in the numbers on price target.
Credit, like everything else is doing a touch better this morning but is likely to move on the next Euro headline – whether meaningful or not.
Since there isn’t much to add to my views from the past week (that Germany is willing to bend), and the weather is great, I will be trying to enjoy the Yankees game and not focusing on every headache inducing headline.