Widening Sovereign Spreads and "Re-Coupling" are dominent Themes on Inauguration Day

Widening Sovereign Spreads and “Re-Coupling” are Dominant Themes on Inauguration Day

As President Obama took the oath of office, the weakness in global equity markets, dollar bloc crosses, and corresponding strength in the fixed income market rang feelings of déjà vu of the price action witnessed in October and November from 2008. Of particular concern was the weakness seen in EURJPY and GBPJPY, shedding considerable value in the last few trading days. The strength in the yen helped fuel a decline in equities as the S and P 500, Dow Jones, Nasdaq 100 all sold down to close near lows, with the S and P futures breaking below the 800 levels shortly after cash equities closed.

The down day was not lost on premiums in options as the VIX rallied 10 points today and closed at 56.65.

The spread between the yield on the benchmark German 10 Year Bund and the yield on many other eurozone sovereigns of that duration are at record wides this morning.  The yield on the German 10 Year Bund is currently 3.05%. Some other 10 Year sovereigns are currently yielding:

Netherlands 3.80%
Portugal 4.40%
Italy 4.52%
Ireland 5.17%
Greece 5.75%

As the European Monetary Union came together the spreads on these bonds had all come together, maybe not to a spread of zero, but relatively close. The move wider has been occurring in earnest for the last year but these current spreads are all record wides since the introduction of the Euro currency.

Currencies – GBPUSD lost over 1000 pips in value during the last two trading sessions from high to low. 14379 stands as the key breakdown level of technical support and an inflection point for us to sell the next bounce against.