This page has been archived and commenting is disabled.
Capital Context Update: Systemic Risk Rising and Equity Underperformance
From Capital Context
The only chart we dare show today but note divergence in oil/silver at close and 'stability' of gold.
Credit and equity markets stumbled significantly mid-afternoon as clearly a crowd of over-levered commodity longs reached for whatever was green in their books. While there will be chatter of corporate bond yields dropping (rallying) today, the real picture was quite bleak with what really matters (the spread or risk premium) rising notably as the need for relative safety saw TSYs bid all across the curve - helping all-in yields look better.
Equities underperformed credit (beta-adjusted) close to close, helping our very profitable
ETF Arb position
close out a 19% profit from Monday's open. A 1bps compression in IG bond yields and flat HY bond yields were much more complementary (thanks to the 5-6bps rally in TSYs) than the decompression we saw in IG and HY CDS (pure credit) and we discuss this in a trade idea we published earlier today. The real story of the day of course is in commodities with the most dramatic moves many will ever experience but away from the momentum chasers and algo-drivers, many of the same themes played out under the covers today in credit, equity, and vol - albeit with some serious attitude adjustments intraday.
The key things we saw today that stand out were as follows:
Credit drifted modestly tighter in the morning (from a significant gap wider open) and just managed to get into the green around mid-afternoon. IG was tracking S&P futures pretty well with relative moves but when 'the bust' happened around 245ET ish, IG ripped across its range taking out the wides of the day in a real hurry.
This move was much less liquid/smooth than the S&P futures dip suggesting someone dumped a lot of long credit in a hurry there
. HY did jump but was actually a little more consistent and had not shown the early positivity as much.
Credit ended pretty much unch from its open of the day session while stocks closed down
- though are drifting up very gently after-hours. HY and IG were pretty balanced today (beta-adjusted) though in absolute spreads HY underperformed - we suggested an ETF-driven strategy to participate in the HY-IG decompression we believe is thematic in an
earlier comment
. Breadth in credit was negative with 4 wideners to every tightener while curves were relatively balanced between steepeners and flatteners (though IG and HY saw modest flattening at the index level).
We won't waste any time discussing Silver/Oil but it is very noteworthy that the two assets were synced at the hip most of the day until the very last few minutes when silver dropped away. Gold/Copper were down 2.5-3% on the day (not small) but a fraction of the shifts we saw in Oil/Silver (i guess that's what happens when he who must be obeyed gets his way with margin hikes and lifting limits).
Trichet's dovishness and the dreadful macro data over here were enough to inch the EUR off its ivory tower and send the excessively long spec crowd covering. While DXY did indeed have a day, it is merely back to 9 day highs and is still -11% from Jackson Hole (and as a reminder oil is +44% from the same time still so please don't be getting too excited about growth prospects and margins again quite yet).
TSY yields closed at their best of the day
- no late day sell-off as stocks recovered for them?might just tell you something about risk appetite and algo-driven VWAP reversion as we managed to rip 10pts off the lows in the last few mins of S&P futures trading even as the themes of the day did not shift.
The interplay between
VIX and Implied Correlation
suggests we saw an early macro overlay once again followed through the middle of the day by single-name protection buying with a crisis peak around the 245ET time, from which vol was sold off. Implied correlation closed at its lows of the day - while VIX was not - suggesting more appetite for single-name protection once again today as investors discriminate more. SPY skews were relatively flat.
CMBX tranches
once again showed the relative performance tilt between super-senior and equity/junior tranches that we spoke about before indicating a pressure of
demand for long correlation (or rising systemic concerns) in that space starting to re-appear
. ABX was down overall as housing confirmed its double dip.
Oil weakness stumbled sovereign spreads in many EM and CEEMEA nations
- a link we have discussed and traded before - but Western European sovereigns underperformed as the Greece is not Ireland is not Portugal arguments were trotted out and last night's True Finns comments hardly helped. Trichet did reflect later in the day that he was more than willing to raise rates at the same time as monetize debt so all is well over there then.
Financials underperformed non-financials
broadly in credit. We did see net buying in US financials but more importantly it was clear that the buying was reducing duration as anything over 7 years was net sold on the day among them. The 7-12Y segment of the curve saw considerable selling pressure in corporate bond land and perhaps explains some of the added momentum in TSYs today as investors rotated from corps to TSYs - extending duration modestly in that respect.
Very clear up-in-quality rotation in credit relative to equities today as chaos reigned.
Contextually
, Transports and Consumer Cyclicals underperformed in credit (beta adjusted) relative to equities whereas Energy and Utilities were sold considerably more in equity land than credit expectations would have thought (as were Basic Materials). Financials were balanced. Low beta CDS actually underperformed higher beta today (Energy and Utes?) as high beta very modestly underperformed low beta in equity terms and the same in vol land.
The most notable theme in capital structures today was a very clear outperformance for better quality credits relative to equity versus lower quality credits
. Bottom-up, Services and Consumer Cyclicals were the only sectors to diverge on average with higher equity prices and wider spreads - the rest of the sectors agreed on direction (if not velocity). Consumer NonCycs, Financials, and Healthcare were the biggest average wideners today (the latter being more about some event risk names). Transports were the only sector whose average spread was tighter on the day.
The names with the largest relative underperformance in credit versus equity included LH, MRK, COST, TU, and KBH and at the other end with credit outperformance over equities AVP, MUR, NXY, COP, and APA (a list dominated by Energy names!).
»
- advertisements -
This is the ZH of yore. Some real data to absorb.
'Scuse me whilst I do that very thing.
We've seen the top of the US equity market for the remainder of the 2011 year.
That's it folks. Lots of chops, head fakes, roller coaster ride downs, and clever attempts to shake the cash from your pretty pockets.
Watch the near term, as the money cartel must justify QE3 or some inside means for same.
Enjoy the markets!
Would another member of Fight Club please confirm what I found?
NYSE Composite > 50 SMA
McClellan Oscillator = Negative
%(New Highs) ~ 3.1%
%(New Lows) = 1.8%
New Highs/New Lows < 2.
EDIT: This post changed. I miscalculated one portion of the criteria.
It looks like we dodged a Hindenburg Omen (the new lows do not exceed 2.8%)but this seems closer than usual. Perhaps we should be keeping an eye out?
Or I am tired and really screwed up this calculation. LOL
Alot of people think we are doomed, but there are still great ways to make money. Even while the economy is collapsing around us.
I subscribe to the guy from australia and his FFT economic newsletter at http://www.forecastfortomorrow.com that guy has called many big events before they have happend, including the stock market crash in 2008 and the current financial collapse of the US. (currently happening) I found him from a friend last year, and he has some important work.
His oil calls are insane, and I have been making good money with them. He is well worth a look, if you want to keep two steps ahead of the sheeple out there.
I am worried about my financial future. Is anyone else nervous out there?
SPAM.
Like the 15th time I've seen this ... "oil calls are insane"...
Get the F out.