Italy and Spain score “again” with a EU Summit victory. As of 11:45 ET the SP-500 (SPY) is up 1.90% as bulls claim a follow-through upset of sorts with Friday’s latest game changer.
We’d like to say we saw it coming a mile away after Italy embarrassed Germany into a 2-1 fold in the Euro Cup and setting up an all-star Debt PIIGS final against Spain on Sunday. And we kinda did, but that’s another story. But in the aftermath of one upset, it is certain another late victory was had overseas after much bearish pooh-poohing early Thursday by Germany’s Merkel reaffirming its stance on no shared debt liability.
At the tail-end of regulation play for the EU Summit, European leaders established a single financial supervisory mechanism known as the European Stability Mechanism which will take the baton for the EFSF. Policymakers also agreed to measures to slash both Italy’s and Spain’s borrowing costs and the allocation of 120.0B euros for the European Investment Bank for the purposed of increasing lending capacity and allowing rescue funds to be used to stabilize the Eurozone’s banks.
On the officially-sanctioned and suddenly much less important stateside economic front given a massive pre-market bid in place, May income and spending data came in mixed with just the modest of discrepancies. Income for the period rose by 0.2% versus estimates of 0.1% while spending missing forecasts of 0.1% with a flat result. Core PCE data showed a 0.1% rise but also came in shy of views of 0.2%.
Intraday, regional manufacturing data for June from the Chicago PMI came in mostly as expected and largely unchanged month-over-month. A reading of 52.9 compared to a prior level of 52.7 and forecasts of 53.0. Separately, Michigan’s Consumer Sentiment survey missed views narrowly with a final May reading of 73.2 versus a prior estimate of 74.1 and Street estimates calling for a flat result.
In those often intertwined markets of influence, following Thursday’s leading bullish second half sprint higher in the EUR/USD, the currency pair is tacking on another 0.70% and challenging its best weekly closing performance in six weeks.
The MSCI Italy (EWI) and Spain (EWP) ETFs are up about 7.50% each and both taking out their June consolidation highs to confirm potential weekly reversal patterns. Even Germany (EWG) is appearing livelier on this particular pitch with shares up 5.5%, though still roughly 3% to 4% below its established June highs.
Our well-tracked economic and technical canaries of oil (USO) and silver (SLV) are boasting outsized relative strength gains of 4.25% to 4.50% Prior and slightly nefarious undercuts of eight and six month lows have been reversed and look to be confirming the lower low variation of the double bottom pattern on the weekly chart.
The iShares Bull ETF (AAPL) is up 1.90% and fulfilling its near 1.0 beta obligation today as it trades in-sync with the SP-500. And for the bears, the KBW Bank ETF (KBW) is lagging with its gain of 1.25% as sonstituents JP Morgan (JPM) and Barclays (BCS) sink lower by 0.55% and nearly 5.0% respectively.
Following sympathetic opening bids tied to broader market strength, investors are keying off company specific risks in both institutions. Much to the chagrin of Jaime Dimon, JP’s “Whale” position is apparently escalating despite recent $2.0B “taken care of business” disclosures with circulating estimates of the loss growing to $4.0 - $6.0B and some rumors of possibly $8.0B - $9.0B at stake. And Barclay’s shares are under pressure in the aftermath of allegations the outfit manipulated England’s Libor interest rate market and will pay $453M in fines.
On the corporate confessional side, shares of Nike (NKE) are going “Whoosh!” instead of “Swoosh!” with a substantial opening downside gap after the athletics giant fell short of profit estimates by $0.20 on earnings of $1.17 per share and further unnerved investors with its disappointing future orders increase of just 7%.
One potential group of traders in the winner’s circle could be delta neutral premium buyers. Today’s fallout in NKE shares exceeded pricing expectations for an expected move of about 8.5% based on its ATM Weeklys implied volatility of 135% last night with an actual gap opening of 9%.
With shares of NKE proceeding to move even lower by an additional 3% before bottoming, the opportunities for hedging short deltas profitably were definitely readily available. That said and intraday, with shares now down just 7.0%, hedge hogs converted into bears out-the-gate, certainly hope at this point in time, they paid themselves at least partially for their risk-taking by buying stock or reducing negative delta counts.
Finally and in those sometimes accurate heat-seeking option markets, the VIX ($VIX) is off 8.5%, which given investors buoyant about-face in the market is none-too-surprising. The pressure puts the sentiment gauge modestly back below its mean-reverting 10SMA by about 5% to 6% and squarely right back at last Friday’s levels.
You may recall at the time we saw the action as confident, but not complacent. The action implied, pardon the pun, and without spelling it out verbatim, some theta-chomping risk taking by bulls in front of the weekend. With the SP-500 higher by nearly 1.50% for the weekly period, I guess we were right…well, kinda sorta. Have a good weekend.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
