Recap 2-26-13


There have been probably a billion words written about the Italian Election and how they could affect the markets, so I will limit myself to these thoughts:

  • No one knows how Italian politics will play out. There are so many parties, so many possible coalitions, an unusual political system which means unusual political strategies… The point is – NO ONE knows. And trading off of Italian political headlines alone looks quite foolhardy.
  • The fact that the ECB backstop (OMT) comes with conditionality, which the new Italian government (if there is one!) may not accept, are making people worried that things could get worse with no help is available, even though Italy has a much better ability to fund itself. 5y & 10y Bond auctions tomorrow are also worrying for some, and rating agencies may start to make some noise.
  • However, it probably won’t matter all that much in the longer run. Markets thought Spain was going to leave the Euro late last Spring. We survived just fine. Remember that no government official wants Armageddon. If push comes to shove, rules will be changed or bent to keep the train on track.
  • On the other hand, it is rare that corrections only last a few days and bounce back immediately, so odds suggest that recent moves may have more room to run, or at the very least need to stabilize before the broader rally can continue. Patience amidst the noise seems prudent here.

Also – there is an interesting divergence building. The chart below shows the S&P vs the HY bond ETF:

As the chart shows, the cross asset relationship looked pretty normal until late Jan, when HY bonds dropped 3%, as the S&P was stable. Since the S&P dropped from its highs over the past week, however, HY bonds are actually higher.

I’m not fully sure what to make of this. It does not seem to be driven by ETF technicals, given that broader HY indices have reacted similarly. In any case, the ability of the US HY market to resist contagion thus far appears, on balance, to be supportive of a constructive view.


  • US Consumer Confidence improved to 69.6 in Feb vs 62 exp and 58.6 prev
  • US New Home Sales jumped to 437k in Jan vs 380k exp and 369k prev
  • US Case-Shiller Home Prices rose 7.3% YoY in Dec vs 7% exp and 3.6% prev

Upcoming Data:

  • Wed: French Consumer Confidence, EU money Supply, UK 4Q GDP, US DGO, Oil Inventories, South Korea Mfg Survey, Japan PMI
  • Thu: Month End, German Unemployment, US Jobless Claims, Japan CPI, China Mfg PMI, HSBC Mfg PMI
  • Fri: US Sequestration starts. ItalyMfg PMI, UKMfg PMI, US Personal Spending, ISM Mfg
  • Mon: AustraliaCurrent Account, China HSBC Services PMI, RBA
  • Tue: Italy / UK / US Services PMI, EU Retail Sales