The T Report: Re-Coupling Trades are Working
Re-Coupling
Spanish and Italian stock markets are both up just over 1% this week already. Germany is about unchanged and the U.S. futures indicate a roughly flat opening. Re-coupling.
Spanish 5 year bond yields are 45 bps better in two days and are close to levels last seen in early May (pre-JPM whale trade). Italy is also doing well. On the other hand, German 10 year bunds have moved a “whopping” 5 bps, but the 10 year has gone from 1.33% to 1.39%. Not really much of a move, but another sign of re-coupling.
In credit, CDS is a touch tighter with MAIN about 7 bps tighter in two days, and IG18 opening just 1 bp tighter. Cash markets in the U.S. are too quiet to get a read on, but seem to be underperforming CDS. More re-coupling.
The “U.S. Wakes Up” Sell-off
For a long period we seemed to have the Europe goes home rally. Europe was dragging markets down and somehow we rallied when they went home. Now, it seems that we have the opposite. We get some mild enthusiasm, which the U.S. tries to bring down. There are more doubters in the U.S. than in Europe right now. Pessimism over what the ECB can accomplish remains high, and I expect we have upside surprise in Europe.
We will give you updates on what any ECB details mean and how it should impact the market. The reality is that the “sell the news” crowd is out in full force, and the initial details are likely to disappoint those calling for unnecessary, but nice, provisions such as ESM banking licenses, etc.
Since It’s Still Deadly Quiet You Time Have to Read
So far the expected volume and volatility surge in September isn’t erupting. It is early, but I think this will be an ongoing theme the markets will have to adapt to.
In the meantime, here is why we think U.S. QE is largely priced in, and European action isn’t. Tepper, QE, and Priced In, playing into the re-coupling theme.
From this weekend we took a closer look at PIIGS Bonds, HY Bonds, and Bank Bonds. The quick conclusion is that investors are ignoring what is happening in Ireland in regards to Spain and Italy, that HY, particularly the ETF’s are frothy, and that Bank CDS in particular still seems rich. Once again, leaving us with the view that re-coupling is the trade.