The Big Difference

Most of the End of the Worlder's (EOTW) have looked to the equity index gyrations for guidance. We watch financial system stress (and possible policy to mitigate) as a better, leading indicator. Those metrics quaked but never indicated meltdown trouble and led us to fade panic over the prior months. The impressive SP rally from 1305 to 1365 is the latest example.

The gyrations since the start of July are different, we believe. Since the ECB opted to drop the deposit rate to zero, futures and forwards have seen a significant DROP in stress metrics. Although we think this ushers in structural problems for the money market soon, the advance to date is impressive. Even more so given the largest LIBOR scandal penalties and investigations to date. Collateral is being hoarded away at an alarming rate.

The quick conclusion is that equities are finally adjusting to the core earnings/growth picture and building immunity to financial conditions improvement. Greater caution is advised as metrics are now pointing to further improvement over the last 72 hours without equity receiving the message. We have noted increased buying pressure in the final hour (a recent positive) but not enough to spark follow through. The Euro is moving to funding currency status with the Yen and the Dollar. The competitive devaluation of the developed world is moving into high gear.

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