Sentiment is looking brighter this morning before several important U.S. economic releases and after Moody’s yesterday cut the rating of 26 Italian Banks, as anticipated by the markets. Treasuries are declining after yesterday’s rally that pushed 7yr yields to a record low, and most sovereign yields are higher as Germany’s economy expanded at a 0.5% pace compared with forecasts that called for a -0.2% contraction. The euro is up +0.1% after falling yesterday to its lowest level since January.

Update: 8:30am EST
Retails sales in the U.S. cooled on the early Easter and seasonably warm weather. U.S. CPI was unchanged, and the core rate climbed +0.2%. Manufacturing in the New York region came in higher than anticipated. The trade gap narrowed less than forecast as exports to the EU continue to slow.

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JP Morgan’s shares tumbled last week after roiling the market on May 10, revealing trading losses that were optimistically reported to be $2B dollars. Some of the blame may lie with Bruno “the London Whale” Iksil, nicknamed so for the oversized positions in a credit derivatives index; CEO Jamie Dimon had previously dismissed said trades as “a complete tempest in a tea pot.” Dimon’s position on the matter changed last week when he stated, “In hindsight, the new strategy was flawed, complex, poorly reviewed poorly executed and poorly monitored.” Chief Investment Officer Ina Drew, head of the unit responsible for the trading loss, and who according to Bloomberg, built her 30-year career by embracing risk and avoiding the spotlight will likely take the brunt of the blame. However, according to two former executives, ultimate blame may lie with Dimon’s push to invest in riskier assets to fatten the bottom line. Fitch responded quickly by cutting JPMorgan’s Long-term Issuer Default Rating (IDR) from AA- to A+, and its Short-term IDR from F+ to F1; S&P followed with an outlook negative and stated a downgrade was possible, citing the possibility of broader problems with their hedging strategies.

Why is this a relevant topic for The MorningSnapshot? JPMorgan’s trading loss may call for an increase in Federal Reserve scrutiny of risk management amid the central bank’s current step-up in post crisis supervision of lenders. Fed officials will continue to gather more information of the trading position responsible for the loss, which they had known about for several weeks. They don’t view their role should be to approve or reject individual trades, rather their job is to ensure firms have enough capital to withstand losses, said the unidentified person who was familiar with the matter

Update:
The WSJ has reported that a number of executives in the bank’s chief investment office, including Ina Drew, may leave as early as this week.

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Sentiment is negative this morning amid the continuing political impasse in Greece, with Spanish 10yr yields climbing above 6% for the first time since April, and from Asia to Europe, equities are falling. The FX markets are in risk-off mode, with the USD and JPY outperforming modestly on the day and the euro weakening. EU sovereign spreads are widening to the German Bund, and commodities are generally lower, with gold down -1.3%.

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Sentiment is lower this morning with EU stocks down, S&P 500 futures pointing to a lower open, and the USD & JPY are both gaining versus most of their peers amid potential Spanish intervention of Bankia and Greece’s failure to form a pro-austerity government. Commodities are moderately lower on the typical risk aversion trades we are seeing this morning.

What Gives? A Ratio Study on The VIX
Has anyone checked out the ratio of the VIX (equity market volatility), to the Markit CDX HY indices (tracks the cost of “insuring” speculative grade debt)? Last week the VIX closed at 0.032 times the level of the Markit CDX High Yield Index, near the two and a half year low of 0.027 times reached in March. This is an indication that risk perceptions between equity and credit investors are diverging by the most in three-years. Might this be an indication of a fundamental shift in the markets? A.K.A- have we witnessed the VIX lows for the year? The VIX is 21% below its one year average, and the gauge of CDS is only down 2.4% from its average. Another fundamental reason to be bullish on the VIX: after the latest run-up in equity markets, investors should be looking to hedge gains, which will keep volatility bid.

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Global equity markets are weak this morning after the disappointing jobless data out of the U.S. on Friday, as well as the results from French and Greek elections over the weekend; the euro is trading at a three-month low. Treasury yields are modestly lower, with some tenors breaching to new lows since February, as the 10yr declined -4.9bps as the risk markets react negatively to EU elections. The USD and JPY are very much outperforming their most heavily traded peers, and the EUR/USD gapped lower and is testing new lows of $1.2955.

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