This week our resident chart expert, Jordan Kotick Global Head of Technical Strategy at Barclays Capital is meeting clients in Europe.
Here’s what Kotick is seeing on the ground.
Q - What are your thoughts on the recent escalation of the European contagion that led to the European "mega package"?
A - It was a good start. But subtly, the market has taken the volley and rallied it right back into the ECBs court. What stands out to us is the form of the spread widening that led to the contagion being recently recognized and acted upon. There are two ways these events tend to unfold: similar to the Asian financial crisis that began in 1997 where currencies in Asia, led by the Thai baht, traded in a straight line higher (currency depreciation) and then right back down. Alternatively there is Hungarian Financial crises where the spread widening was a stair step advance that took time before the panic move took hold. We believe the current European cries is more like the Hungarian example.
Q - What are you seeing?
A - While the spreads in Greece and Portugal for example followed the Hungarian template, they have returned to more normalized levels. What concerns us is the spreads in Spain and Italy are just starting to break out. Think of them as in the position where Greece was a month or two before the blowout began.
Q - What are the implications for the investor?
A - I am reminded of Oliver Twist when he said "Please sir, I want some more". The market seems to be warning that the problems are not yet solved and the implications are bullish for the USDollar, continued outperformance of German bonds over other European rates and arguably US counterparts and further weakness for the Euro on selected cross rates.
Q - And for equities?
A - On an absolute basis, remember that stocks were both bullish (S&P up 17%) from the Feb. low as spreads blew out in Europe and bearish (S&P down 15% from the April peak) as other European spreads widen. So directionally, there is no clear equity ramifications. But it does suggest continued European equity underperformance on a relative basis.
A - Any final thoughts?
Q - One last one. Many assume that the summer months tend to be low volatility markets, calmer waters sort to speak. Not this summer.
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