Sentiment is up this morning as European stocks extend their biggest Q1 advance since 2006 and the euro is gaining while default risk falls as euro-area finance ministers meet regarding increasing rescue funds. Officials are nearing an agreement to increase the upper limit on emergency lending to €800B euros until mid-2013. The Euro Stoxx 50 is up +0.91%, the euro is trading +0.4% higher, and sovereign debt yields are mixed. S&P 500 futures are +0.449% in the green and Treasuries are up +0.5bps to 2.164%, staying above the 2.15% support level.
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Sentiment is sour this morning with European stocks falling after euro-area March economic confidence fell, and Asian stocks are extending their second day of declines on concern about a slowdown in China; companies on both continents missed earnings estimates today. Not helping matters is the statements from S&P stating that Greece may have to restructure its debt again. Before a U.S. GDP release and jobless claims, S&P 500 futures have reversed early gains and are down -0.32%; the 10yr Treasury is down -2.1bps to 2.178% in early morning trading. Asian stocks are much lower, led down by the Hang Seng Index which closed -1.32%, and the Yen appreciated against all 16 of its peers. The Euro Stoxx 50 is down -1.09% with Germany’s DAX down -1.19% and Italy’s FTSE MIB down -1.31%. The yield on Spanish 10yr bonds are up +11.8bps to 5.402% and its spread to German bunds has widened +11.4bps to 337.1bps. Commodities are lower amid surging oil stockpiles as Western nations discuss tapping emergency reserves. Oil and copper are both down -0.5% on the day.
“I Plead The Fifth!”
MF Global assistant treasurer Edith O’Brien invoked her constitutional right against self-incrimination yesterday during a House Financial Services subcommittee on the firm’s bankruptcy. Former MF Global CEO Jon Corzine identified O’Brien as a person with knowledge of transfers, which may have included customer funds. $1.6B dollars remains the bankruptcy trustee’s estimate for the total shortfall between customer claims and available assets.
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Sentiment is mixed this morning with S&P 500 futures up +0.123%, European equities slightly lower with the Euro Stoxx 50 down -0.12%, and Commodities are down amid indications for a slowdown in copper demand in China as well as rising crude oil inventories. The 10yr Treasury is up +1.6bps to 2.2% in early trading, and the euro is gaining versus the dollar.
Exchange-Traded Note (ETN) Risk
A Barclays Exchange-Traded Note (ETN) that traded 134% above the value of the natural-gas index it is tied to has lost 47% of the premium in just three days as traders and investors exit the fund. The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN has crashed -29% since March 21 while its benchmark index declined -6.5%. Barclays suspended issuing new shares in August 2009, which may cause the notes “to trade at a premium or discount in relation to their indicative value,” the bank said in a statement at the time. Yesterday, the ETN fell -2.7% to $3.66.
Additionally a Credit Suisse ETN, VelocityShares Daily 2x VIX Short-Term ETN (TVIX), has become unhinged from the S&P 500 VIX Short-Term Futures Index, the measure the note was designed to track, after suspending issuance of new shares a month ago, “due to internal limits on the size of the ETNs,” according to a statement at the time. ETFs and ETNs typically trade in lockstep with their so-called net asset value (NAV), the value of their assets less the value of liabilities. By contrast, TVIX jumped to 36% above NAV on March 16 before the gap expanded to 62%, 78%, and 89% over the next three days, according to data from Bloomberg. After Credit Suisse resumed issuance of shares on March 23, it has since snapped back to 6.9% above NAV. “People should have made a bigger deal on Feb. 21 when they were suspending it because it’s directly tied to how the product became overvalued,” Peter Tchir, founder of TF Market Advisors in New York, said in a March 23 phone interview. “The product got too big and then this turning on and turning off of the creation rights doesn’t seem to go through a very formal process and yet it’s clearly critical to the value and how these things trade.” In order to offset price distortions caused by investors buying and selling ETFs or ETNs, sponsors regularly create and redeem shares to keep them closely pegged to their underlying assets. Speculation that volatility would come back pushed investors into securities such as the TVIX at the fastest rate ever according to Bloomberg.
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