Many of the headlines this morning attributed today's selloff to the Affordable Care Act being upheld. This is quite wrong, and it's dangerous for traders to think that today's market action is a result of this news item.
Regardless of what InTrade numbers showed prior to the announcement, the ACA was already largely priced into the market. The total effect that this legislation is going to have on corporate earnings is far more than a 1% P/E contraction; if this was a real shock to market participants, we'd be seeing stocks tanking several percentage points. However, due to its highly politicized nature, I'm going stay away from discussing the bill's internals.
Today's 1% selloff is the result of far more than the Supreme Court's decision to uphold the ACA. I hope readers recognize the importance of some of today's buried headlines and new data, since the market reaction gave some very telling signs. Additionally, some of the news that has gone under the radar today will effect the underpinnings of trading over the next few weeks.
With Europe unable to produce any meaningful solutions (big surprise) or even a market-ramping, nonsensical rumor, traders seem to have fully given up on the Summit. This is exceptionally important; market sentiment during times of EU Summits has typically been very optimistic, and traders would price in some sort of "solution" before anything was even announced.
Traders now need to recognize the risk in being short with such negative sentiment towards Europe being priced in. Any bullish headline news, true or not, will catch short sellers far out of their positions.
The talk of Eurobonds seems to have been put to rest for good now (I really hope). Merkel and German colleagues appear unwilling to allow rumors of potential collective debt issuance to float around the marketplace for even a few hours. The Chancellor got as aggressive as we've seen yesterday with her statement that there will be no such debt issuance for "as long as I live."
This kind of development opens up far more downside, as market-ramping rumors like Eurobond issuance have generally contained selling and volatility. Short-sellers have been unwilling to stick with their positions for very long out of fear of headline risk.
With Spain's banks already bailed out, Germany unwilling to let bullish rumors cycle around, ECB collateral standards already eased, and the ESM seemingly unwilling to get off the ground, Europe is running out of bazookas. Today's heavy selling is indicative of the beginning of a complete loss of confidence in Europe, and thus risk-off; the 2.5% decline in US 10 year's, decline in gold, and pummeling in momentum stocks supports that.
Spanish and Italian Bonds
At the risk of Monday-morning quarterbacking, I was positioned via short futures contracts to take advantage of a weak Italian bond auction. There was almost no talk of the issuance leading up to Thursday morning, which has been a recipe for huge spikes in market volatility for much of the year.
The Italian auction was poor, with Italy paying 6.19% on its 10 year bonds. Spanish 10 year bonds climbed above 7%, before gaining some short-lived strength on the back of eurobond issuance (what else!)
There is nothing new here, except for the fact that Italian debt is weakening far quicker than most anticipated. World credit and equity markets are actually in meaningfully better shape than the last time these two nations saw their interest payments this high; with both markets on the decline once again, I expect Spanish yields to head towards 8% and Italian yields toward 7%. Both figures would indicate a crisis level.
JP Morgan's Continued Issues And Contagion To Other Financials
The New York Times' story this morning sent shockwaves through the major financials, with JP Morgan (JPM) down 4.5% as I write. The market reaction is a bit overblown in my opinion; anyone investing in TBTF banks should be aware of the unacceptable risks that these firms have on their balance sheets, outstanding trades and trillions in derivative exposure included.
Jobless Claims "Drop..." Again
Thanks to another round of prior week revisions, claims dropped 6,000 to 386,000. In conjunction with the final reading on Q1 GDP of 1.9%, the market can now firmly determine that sub 2% growth is not nearly enough to improve the employment situation.
Corporate profits saw the slimmest growth in years according to the report.
Don't get fooled into thinking today's selloff has been a result of the Obamacare decision. Far more important is the deterioration in Spanish and Italian debt, and the market sentiment towards the Euro Summit.