Friday, July 29, 2011

The Circus In Washington Continues

Yesterday's vote on Rep. Boehner's plan failed to garner enough support to go to a vote. One more black eye on the political process in Washington. Again, while most people will only look to those headlines and equate them to what is going on in the market, there is more to the story.

Preliminary readings on Q2 GDP came in below expectations at 1.3%. This is another datapoint highlighting the global economic slowdown we have seen recently. The Chicago PMI came in slightly above expectations at 58.8 (vs. 58.0 consensus).

There was another round of solid earnings reports, including the likes of SBUX, MET, CHK, and DECK to name a few. Most earnings reports have not garnered much attention as the debt ceiling talks have dominated the headlines.

The dollar is lower, and commodities are mixed. Oil prices are down near $96, while gold prices are higher to $1625.

Asian markets were lower overnight, and Europe was down this morning. Moody's has put Spain on review for a downgrade, and yields in Italy have been rising. The credit default swaps on most of the PIIGS nations have been breaking to new highs this week. Very few people are talking about this.

The 10-year yield is dropping sharply this morning, down to 2.85%; and the VIX has spiked to a 4-month high near 26 before settling back around 23.80 currently.

Trading comment: The markets opened sharply lower this morning, on disappointment over no debt deal and a lower than expected GDP reading. But within the first hour of trading, the selling seemed to dry up, and the markets began to rebound. Rumors on the trading floor was that traders wanted to get long ahead of the weekend in case a deal got done before the open on Monday. The markets rallied all the way back to positive territory as I am finishing this post. The SPX briefly touched its 200-day average at 1285, but has since recaptured 1300.

As for the fears about the debt ceiling, the chart below shows the persistent downtrend recently in the 10-year Treasury note. This is the exact opposite of the action witnessed in Italy, Spain, etc., where yields are rising. So the bond market isn't too worried about the debt ceiling.

long CHK


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