MARVIN LOH – DIRECTOR, TRADING SERVICES
The characterization of the 2012 market as “boring” came to an abrupt halt today, as European fears reinvigorated the VIX and gave investors reason to take profits. The primary driver today has been an expected slate of downgrades of European sovereigns, which were largely promised at the start of December. Although we would consider this “old news,” the reality of seeing the downgrades in print has given the market a reason to pause, allowing the bears to resurface. In contrast, euro yields had been steadily improving, leading to a relatively strong auction of Italian and Spanish debt on Thursday. Since Rome and this crisis was not built overnight, it would be naive to believe that a solution can be found in short order. Instead we find ourselves again focused on a possible Greek default and increasing expectations that it will exit the euro. As we worry about unintended consequences, we also believe that the markets have had ample time to ruminate over these possibilities, which compresses tail risk. Look for increased headlines from Greece as talks with its creditors drag on. Earnings started this week and will move into high gear next week. An early characterization is that earnings have been disappointing, with JP Morgan’s consensus matching EPS’ results, which generally disappointed the markets. Read the full commentary now.
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