Tuesday, May 4, 2010

Market Update and Equity Sectors Overview

· Market Update – despite some steep % declines in various asset classes around the world, the sp500 has been pretty flattish since 11am, holding the important 1170 technical level.  Given the deterioration in the afternoon seen in the euro and US corp credit (IG), the fact the SP was able to hang flat is being viewed as a small victory (IG blew out 7 ½ while the Euro slumped 1.5% - both ended near their worst levels).  Europe remains the market’s biggest story, as heightened sovereign fears around such countries as Greece, Spain, and Portugal weigh.  Overnight, reports of a Spain IMF aid package being put together combined w/talk that Greece had retained Lazard to explore a debt restructuring hit risk assets across the board.  The markets at this point are all but ignoring comments/actions from European officials intended to calm tensions (i.e. both the Spain and Greece stories were denied several times by various people but the euro slide lower throughout the day nonetheless).  This inability of European officials to arrest the sovereign panic is prompting a flight away from the euro.  The euro fell more than 1.5% on the day and slide right through several important technical levels (1.31 and then 1.30) w/many people pointing to the ECB’s Greek bond collateral rule change announced Mon morning as the big catalyst for the move (a DJ article said the ECB move “stunned” markets and is being seen by some as marking the start of a renewed quantitative easing campaign; a Bloomberg article today noted that the next logical step for the ECB would be for it to start making outright purchases of sovereign paper in the secondary market).  CDS spreads blew out on all the usual suspects as bond prices fell in Europe, although German bunds surged again (yields on 2yr German bunds dropped to 0.71% today, down ~10bp from Mon), signaling that there isn’t a complete flight away from the eurozone (CDS hasn’t yet taken out the panicked wides from last week although many are getting close).  China, while on the backburner, remains an overhang too given the country’s repeated efforts to cool housing & bank lending (see this weekend’s RRR hike) although more dramatic actions (like a yuan adjustment higher and/or an outright rate hike may have been put on hold by the situation in Europe and the decline in the euro).  In terms of color from the US equities desk, it was a pretty quiet session for the most part although there is def. a change in tone among investors.  There hasn’t been the big dip bid that was evident for much of the past couple months, although larger vanillas have been holding onto positions.  Investors w/a more near-term perspective have become much more comfortable laying out short exposures, esp. in those groups tied to the “China slowdown” theme (i.e. the metals) or the Europe/export cohort (a lot of the big industrials).  The selling that did take place wasn’t panicked and occurred relatively orderly, although the VIX spiked 20% and closed above its 200day MA.  Away from Europe, the headlines remain encouraging.  Economic #s are coming in robust and signaling that the powerful manufacturing rebound remains intact (the JPMorgan Global Manufacturing PMI hit a fresh high for this recovery while Apr truck sales showed a large uptick in Aor) while we are coming off a very strong Q1 earnings season (NWS is the latest major co to post better results – the stock is trading higher in the after hours).  Technically, we briefly broke under 1170 in the afternoon but we managed to close north of this technically important level.  In the coming weeks, the focus will increasingly shift to this Thurs’ ECB meeting, where investors are wondering if Trichet will be forced to take more dramatic action (along the lines of the Greek collateral rule waiver from Mon).  Expectations for this Fri’s BLS report are also inching higher despite Europe.

· Equity sectors: Materials got hit very hard today, falling over 3.75% as worries in Europe caused a spike in the dollar, sending commodity prices sharply lower.  In addition, a lot of key base metals (copper, zinc, aluminum) are getting very close to falling through their 200 day moving averages.  Industrials were about as bad, falling over 3.25% as investors moved money out of the higher beta machinery, airline, and homebuilder names.  Big US exporters (which include a lot of the industrials) were hit w/the dollar strength.  Tech and discretionary were off around 3% with weakness across the board as investors unloaded higher beta names. Financials lagged the tape, falling over 2.5% although GS was flattish after news came out this morning that they would begin talking with the SEC to settle the fraud case. Energy fell around 2.5% as well as crude fell over $3 under $83 and on BHI’s earnings. A lot of the GOM stocks though recovered a bit – BP, APC, RIG all acted OK.  Telecoms fell over 1.5%, outperforming the tape, but dragged down on weakness in S and PCS. Utilities fell over 1.75%, beating the market, but weighed by AES and NRG. Staples and healthcare were both off less than 1% as investors defended

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