by Tony Pallotta of Macrostory.com
Trouble Brewing In Credit Markets
Credit markets continue to signal either a weakening economy or outright recession yet equities refuse to pay attention. With daily market volume dominated by intraday traders with no concern about macro data this comes as no surprise. The danger becomes that equity markets have no ability at forecasting any longer. The Great Recession saw equities peak just two months before contraction began. We may in fact be watching the same horrific forecasting ability play out if the credit markets are accurate.
Below are three charts signaling trouble ahead for both the economy and the equity market. Equities have diverged from almost any correlation that existed for years. With a divergence you never know who is wrong. When countless relationships breakdown though and equities are always involved it becomes easier to say truly that “it’s not you it’s me.”
5 Year Interest Rate Swap Spread
And of course the real elephant in the room is BAC precarious close to completely breaking down. Below is a chart of March through May 2009. Yes you need to go that far back to find support levels and there are few remaining. Once 9.50 is breached the next stop is $8. At what point do the credit markets shut them out of any capital raises. At what point does contagion in the US banking sector bring this charade call the US Equity market down. If history is a guide we are in fact a lot closer than group think suspects.