Reuters Insider - Inside the News: Sell Spiking U.S. Sovereign CDS-Rombach
13/06/2016 11:07
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Description: Reuters Credit Analyst Ed Rombach says the U.S.
CDS tends to track inversely to USD/EUR, and the
U.S. sovereign CDS should be sold because their
spike seems to put them at odds with the EUR/USD.
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Time to go Inside the News at 11AM. Three legal sources tell Reuters ex-trader
Danielle Chiesi is expected to plead guilty to criminal charges in the Galleon
hedge fund insider trading case. Chiesi's lawyer, Alan Kaufman, declined to
comment on a scheduled appearance in Manhattan Federal Court on Wednesday. We'll
have more on this story as soon as we get it. Just dead, that's how Goldman
Sachs CFO David Viniar describes customer activity in December. He attributes
this to the violence of market movements. Fixed income revenue fell 39% in the
fourth quarter which dragged down overall profit and earnings at the investment
bank, missing expectations. Wells Fargo and US Bancorp reported gains in
quarterly profit but the sector overall is down about 1% today as measured by
the Financials ETF, the XLF, though it remains near the top of its range over
the past year. Housing starts fell to their lowest level in more than a year in
December. Building permits climbed but both remained far from their peaks.
The Homebuilders ETF, the XHB is down close to 2% today but remains about 30%
above its 1-year low from August. US sovereign CDS spreads have spiked recently
and now may be the time to sell according to Reuters Credit Analyst Ed Rombach.
He joins us now with more. So Ed, is this just because of all the debt ceiling
talk? I mean, why sell now? Well, Treasury Secretary Geithner says the sky will
fall if the debt ceiling isn't raised and the 20% spike in US sovereign CDS over
the past couple of days suggests that this view is gaining traction. But I'm
saying that it's inconceivable that the US government will default on its debt.
Politically, they could only do so if they made a political decision to do so.
That's not gonna happen, alright? Operationally-speaking, they can always sell,
print more Dollars. However, that risks further Dollar devaluation and inflation
which some would argue is default by another name, alright? This is why US
sovereign CDS settles in Euro because you wouldn't wanna be paid off your
default insurance on US sovereign debt in a currency that can be devalued away
to nothing, alright? In this context, the US CDS, sovereign CDS tends to track
inversely to the Euro, not exactly one for one but tends to be inverse. So the
recent spike higher in the Euro and decline in the Dollar seems to be
inconsistent with the higher spike in US sovereign CDS. Unless you think the
Dollar is going higher, I would be selling US sovereign CDS here. If it goes
higher, it sells some more. Very interesting. Ed Rombach, thanks a lot.
In today's Hot Stocks: IBM is changing hands at close to its average daily
volume in the early hours of today's trading. We've got it up right now more
than 3%. The tech giant reported a stronger than expected quarterly profit and
raised its guidance for this year. And Linear Tech is trading at about 1.5%
times its average daily volume over the past 30 days. It's down more than 4%.
The chipmaker cut its forecast for the current quarter because of declining PC
sales. US President Obama and China's President Hu Jintao announced $45 billion
in export deals as part of their meeting in Washington today. Later, they will
meet with business leaders from both countries including GE's CEO Jeffrey
Immelt. Reuters Global Editor-at-large Chrystia Freeland will conduct an
exclusive interview with Immelt today which you can see at 3:30 this afternoon.
Our next update is at noon. I'm Jen Rogers. This is Reuters Insider