…and the stock market isn’t paying attention!
Markets were up on the broader index but mixed overall, with 319 names lower in the S&P 500 and 180 higher. The day was uneventful from an equity market standpoint, but we saw big moves in FX, with the EURUSD standing out. The French called for a no-confidence vote for their newly appointed Prime Minister, Michel Barnier, and this sent the EURUSD down by around 80 bps on the day.
The EURUSD doesn’t look great at this point and probably could fall further. Indeed, when looking at the technicals, a drop below 1.04 and potentially below 1.03 looks possible. Momentum is bearish and not showing much in the way of a clear bottom yet.
French 5-year credit default swaps have traded to their highest level since 2020.
Meanwhile, the French/German 10-year spread rose to its highest since 2012. So, as long as the French budget issues persist, the euro risks further struggles.
Additionally, today, we saw the S&P 500 ATM 1-month IV and Stoxx 50 ATM 1-month IV spread widen out to 4.5 vols, which is a pretty decent-sized spread. More recently, it has only been higher once, and that was when the whole French parliamentary issue started back in late May and June. Whether these issues spill over into US markets remains to be seen. I guess it will come down to how long and how severe the problems become.
The US and German 10-year spreads are at an important spot, at 2.16%. If the spread rises above 2.2%, it could lead to a pretty sharp breakdown in the euro.
The opposite happens in Japan, with 10-year spreads and US rates contracting. If the spread continues to contract, it will lead to a stronger USDJPY, meaning the USDJPY falls from its current level.
Of course, you could imagine what that means if the US dollar strengthens across just about every G10 currency except for the yen, and it isn’t pretty. The EURJPY is not far off its August lows.
It is the same look for the AUDJPY, MXNJPY, CADJPY, GBPJPY, and CHFJPY. I guess the bigger question is when the US stock market will care.
I guess we will find out soon enough.
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VIA SHUTTERSTOCK
Originally posted on December 2, 2024 on Mott Capital blog
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
