Re-Pricing Risk and Rate Hikes

As investors awaited news from the Federal Reserve Open Market Committee, the Fast Money traders were watching foreign markets and their impact on commodities. European risk spreads, steel companies, and the energy sector were top of mind for the traders. “What I am watching and what the markets are watching seem to be different things,” said Kanundrum Capital’s Brian Kelly.

Kelly’s focus centered on Spanish bonds. Though Spanish borrowing costs were rising — the yield on the 10-year Spanish bond was up four basis points this morning — the cost of insuring Spanish debt was falling. The discrepancy signaled to Kelly that investors were adjusting risk multiples on European sovereign debt. “There’s a re-pricing of risk in Europe,” said Kelly, “which would be a positive.”

Stephen Weiss was watching the impact of China and India’s attempts to cool their economies on commodities, namely steel. Facing 5.1 percent inflation, China has steadily raised its bank reserve requirements in hopes of reducing loan growth. India hiked rates this morning, despite a lower-than-expected inflation. India’s wholesale price index climbed 7.5 percent in November, a slowdown from October’s 8.9 percent rise. “India inflation came down,” said the Short Hills Capital founder, noting that appeared to be a correlated tightening in the cost of insuring the debt of steel companies. “CDS spreads are tightening for the steel stocks.”

Virtus’ Joe Terranova was also watching steel. “I think steel pricing, which most folks looked at for the first quarter… the estimates are rising a little bit,” Terranova said. “Maybe there is a trade here.” Terranova signaled out Steel Dynamics as one of the better run companies in the space.

Emerging Money’s Tim Seymourwas watching integrated oil companies. The sector appeared undervalued in the wake of rising fuel prices, said Seymour. “I think you could take a shot at BP here,” said Seymour.

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