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Markets are called to open flat this morning. This is what's happening today:
The VIX slid 25% in the last three days (the biggest slump in the last 10-months). The reason being is that investors are paying the least for protection since the beginning of the year. The VIX is down 31% since the beginning of the year. The fall in the VIX is also caused by an expected extention of operation twist by the Fed which has a $400bln stimulus program expiring this month. The Fed can also come up with revised forecasts for growth in the US. for this year.
Moving onto Greece, a coalition government has still not been formed. Despite the New Democracy government wanting to stay in the Eurozone, Citigroup are still of the opinion that there is a 50-75% probability that Greece will leave the Eurozone within the next two years.
World leaders told Europe to pull together to overcome its debt crisis, endorsing a road map for tighter integration to cut borrowing costs and prevent further damage to the global economy. With Spain readying a request within days for as much as E100b for its struggling banks, euro-area leaders at a Group of 20 summit in Mexico pledged to take “all necessary policy measures” to defend the currency union. The U.S. committed to cut spending while avoiding a “sharp fiscal contraction” in 2013.
The largest drop in the VIX Index since August brought the gauge to its cheapest level of the year, a sign of increasing confidence among traders that the Fed will take action again to spur growth. The central bank, which began a two-day meeting yesterday, will extend its so-called Operation Twist program, according to JPMorgan Chase & Co. and Jefferies & Co. It involves selling short-term debt and buying longer-term bonds. A more aggressive response could be warranted if the Fed sees high costs in an economic slowdown.
Time to buy back gold?
Socgen: Gold is back to the lower band of the trading range of the past year. It is also the commodity that benefits most from the Fed’s unconventional monetary policies. As a result, we are strong overweight gold ahead of QE3 and expect its price to challenge $1,800 before the end of the year.
Spain & Italy
Europe’s defenses may need increased flexibility to compensate for a lack of financial muscle in building firebreaks to protect Italy and Spain from the worsening debt crisis.
Even as emerging market nations dispatch more cash to the International Monetary Fund for a global backstop, Europe’s firewalls are insufficient to bail out the region’s third- and fourth-largest economies, say Barclays Plc and Berenberg Bank.
Spain has E345b of principal and interest fees through 2014, while Italy faces E704b. Those needs may force authorities to attempt to stretch the funds they have and avoid a three-year bailout akin to that of Greece. Speculation the Spanish government may become the fourth European nation to seek aid propelled the country’s 10-year bond yield above 7% this week.
Stock to watch: Wells Fargo (Price $32.96, Price Target $36)
We believe WFC is better-positioned longer-term given likely meaningful cost reductions, market share gains, and balance sheet flexibility. We continue to expect better management of its MSR, securities portfolio, fee revenue, and successful managing down of the balance sheet. We expect smaller mortgage hits given a higher quality servicing book and the capital story remains attractive. BUY.
For further information on Wells Fargo or other stocks we follow, contact our offices on 25688688.
Good day and happy trading!
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