Trading View

The S&P500 has now rallied 8.7% since the 12th July. This has been driven by an ongoing improvement in US macro data vs expectations (note Citi Econ Surprise index has rallied from -66 to 17.40 presently).

This has been the catalyst for risk aversion (MRI CITI) to fall to the lowest level since Q1 2010. This risk aversion index is derived from emerging market sovereign spreads, US credit spreads, US swap spreads and implied FX, equity and swap rate volatility, i.e. there is a limited equity component to the index.

This marked decline in risk aversion has not been reflected in equity PM activity (exposure) or asset allocation - no more clearly reflected than in volumes - note in the past twelve trading days alone trade has averaged 6 billion shares, 8% below the very low YTD average.

European Financials credit was very constructive y/day and present levels would support European Bank index (SX7P) trading c7% higher. The compression of volatility in FX and Equities is now extending to European Bond markets with Spanish 10yr specifically now trading the tightest range for the longest period (40bps spread) for 12 months.

Clearly with Emerging ETFs/Brazil/Aus/$/US energy & mining/commodities all soft market is moving to recognize demand (growth) slowdown but note the contd improvement in Baltic Dry from the low 3 weeks ago. We are increasingly focused on the improvements of European credit markets as a lead indicator for Industrial Production - present credit levels would support IP being 5% higher. We target 1500 for S&P in October.

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