There’s a reason we keep highlighting bank credit indicators like the TED spread. They’re on the march (widening every day), and it’s becoming obvious that the stock market is taking its marching from it.
As BTIG’s Mike O’Rourke observes:
The key focus for many equity investors was the widening of swap spreads across the board. Whether one looks at the 2 year swap spread, the TED spread, Libor-OIS and so on, they all continue to move in the same direction – wider. The bottom line is that equity investors will continue to remain tentative until some level of stability emerges among these spreads. Market participants are accustomed to watching the S&P 500 chase the Euro around all day and now, a new trend is emerging. Today the S&P 500 Financials traded inversely to the 2 year swap spread. As usual, the market sees a trend and exploits it until it reverses. This type of market behaviour leans more towards the category of speculating than it does investing.
In theory this ends when market participants become more comfortable with banking health. In practice, signs like that which we got out of Spain today don’t look like what we get when a crisis is abating.