Market Pros: Europe Woes Near Tipping Point?
American investors may have saddled up to a plate piled high with turkey, yams and cornbread but elsewhere in the world it’s business as usual.
And among the major issues facing investors is the fear of contagion in Europe. In fact, it’s caused the yields of bonds issued by Portugal and Spain to surge.
In other words investors are demanding extra yield to finance these two governments.
If you’re looking for a market ‘tell’ to determine just how serious the situation may become – the secret is to watch the spread between Portugal or Spain against Germany’s bonds, the benchmark.
James Chappel at Olive Tree securities in London is telling investors that time and time again - a gap of 4% is 'the' point of no return. And that goes for any country – not just Spain or Portugal.
A bailout for Spain is particularly concerning because it would almost empty the emergency fund that was set up by the EU and IMF.
Peter Boockvar, Miller Tabak Equity Strategist, tells the desk that he's afraid to think about the worst case scenario for Spain because "it could lead to a potential meltdown in Europe."
"Remember, the combined GDP of Ireland, Portugal and Greece is less than Spain," he says. "If the financial woes are limited to those three nations we'll be okay. It's all about Spain."
How should you position?
Instant Insights with the Fast Money traders
I think the trade is long German banks such as Deutsche, says Tim Seymour. I don’t think believe the Germans will tolerate the German banks taking a hit.
I’d look at big Spanish banks such as Santander or BBVA , says Joe Terranova. They’ve been thrown out with the bathwater yet they are well capitalized.
I’m skeptical, counters Steve Cortes. Price action doesn’t lie and the price action in STD and BBVA are very foreboding. In fact most European banks are trading far worse than their American peers. That suggests to me things will get worse not better.
The traders are closely watching the action in crude oil which closed sharply higher on Wednesday. In fact it settled at its highest level in more than week.
What’s the trade?
China is short diesel, reminds Joe Terranova. Middle eastern crude has moved from contago to backwardation and that’s bullish. It suggests to me the trade is long refiners such as Sunoco .
In the space I like Tesoro, says Tim Seymour. But I’d also look at integrated names such as Exxon.
I used the broad move higher to get short, counters Steve Cortes. I think weakness in China is bearish for oil.
Industrials were the best performing sector Friday, with Caterpillar and Honeywell hitting new 52 week highs. But Deere closed lower after its forecast fell short of estimates.
What’s the trade?
I’m a buyer of Deere, says Joe Terranova. It’s ok to own and I’d pick some up on the pullback.
In the space, I’d put Cooper Industries on the radar, says Guy Adami. I still think it has room to run.
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CNBC.com and wires