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Stock Market Strategy: AUD/JPY & the S&P500 Update + Credit Review w/ MJ

 Bottom Line: The ‘Carry trade’ and credit as defined by the CDX IG index are both holding support and consolidating.

All eyes seem to be focused on the Greek resolution proceedings. Fear of disaster remains high. I suspect a positive resolution will allow credit spreads to tighten (bullish) and the ‘carry trade’ to expand (bullish).

I don’t believe in coincidence. I do believe in the following U.S. Marine Corps’ axiom:

The first time something happens it’s chance.                                                                                                                                                                                            The second time it happens it’s coincidence.                                                                                                                                                                                             The third time it happens your enemy is in your midst.

Having said the above I would like to draw your attention to my May 16th post. I wrote, “The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.” So, as we come to the end of June and the end of QE2 a “surprising” “positive” resolution to the Greek debt issue that propels the equity markets higher in July would not “surprise” me….

Credit Watch – By MJ the Credit Guru

6/28/11- Credit opened up weaker, but quickly started to tighten as equity futures turned green. Credit is about 1 1/2bps tighter so far this morning, lowering the IG CDX16 Index’s mid spread to about 98.5bps. Despite the strength in the index this morning, we continue to be concerned with the level of spread volatility and believe credit traders are likely to fad the rally and concentrate on trading the range of about 96bps to 100bps.                                                                                                                                                                                                                We also find it worth mentioning that BAC pfds were slightly off yesterday and its 5-year CDS was wider even though its equity had a pretty strong day. Depsite the recent uncertainty, BAC’s CDS credit curve has remained steep, indicating that the weakening in its 5-year CDS is a function of market risk and trading flows and not an indication of higher immediate default risk.  In our opinion, we do not currently believe that the VIX will raise above 25 unless BAC and other bank CDS credit curves begin to experience bear market flatteners indicating an increase in default risk and higher systematic risk.

Carry Trade Watch – AUD/JPY update