Market Slip Worse Than the Dip

- Risk aversion migrates to overstated double-dip concerns — "sovereign sensitivity has diminished, but the ongoing downward revision to growth expectations is weighing on markets. The negative momentum probably isn’t over, but the full double-dip being discounted by an increasing part of the market isn’t reflected in the forward-looking data."
- Expect mixed messages in 2Q earnings — "strong activity data in 2Q should sustain momentum in non-financial earnings growth, but outlook statements are likely to reflect weaker economic sentiment. Bank earnings will be dented by difficult market conditions, which may cause some negative surprises, but on the whole we believe the downside is priced in."
- European banks – "stressed to impress? The stress tests will probably find individual weaknesses, but systemic solidity. With parameters likely to generate a manageable result, we think the ‘feel-good factor’ in the market will prove relatively short-lived."
- Maintaining a long bias in credit — "the resilience of credit spreads over the last
month suggests positioning is now much more balanced. Against attractive valuations and our impression that cash holdings have been built up, we continue to believe that credit spreads can perform – or at least hold their ground – despite the challenging backdrop."
- Keeping beta, but staying short peripherals — "we have made few changes to the portfolio this month. So we maintain beta exposure in banks and global cyclicals, but we stay short credit linked to periphery sovereigns."
Citigroup Credit Outlook 20100712

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