After last week’s doom & gloom (see here) all appears significantly more rosy at the start of this week. The iTraxx Crossover index, currently trading at 285 as I type, is tighter than the 310 highs reached during last week with other areas of the market also bouncing back. Will it last? Well, this week’s plethora of data could give a good indication and potentially set the tone through the summer.
Firstly the earnings season in the US really kicks in with 80 of the S&P 500 names reporting. Of those names approximately 50 are financials, including Washington Mutual, JP Morgan, Merrill Lynch, Citigroup and Bank of America. The Q2 figures and Q3 guidance will be watched very closely for indications of just how significant an impact the current US sub prime debacle is likely to have upon earnings. Secondly Fed Governor Bernanke will give his semi annual Humphrey-Hawkins testimony to congress on Wednesday with the Fed minutes to be released the following day. Finally there is a whole raft of inflation, confidence, manufacturing & housing related data set to be released both in Europe, China & the US.
I personally, can see a scenario whereby the pending earnings data surprises to the upside and enables credit markets to rally in the short term. However, for the many reasons we have laid out in this blog I continue to be happy with maintaining a short risk position in credit.