CapitalContext's blog

Equities outperformed credit today, prompting a re-entry in our relative-value ETF position but while indices show improvement, rotation across sectors, quality cohorts, and capital structures suggest risk appetite is sorely lacking.

Equities underperformed credit once again as macro protection was in demand (in all asset classes) and some rotation from macro-to-micro protection in equities ended a day which was very ugly open-to-close despite what headlines will yell.

Away from the chaos that was the commodities sector today, recent themes in credit, equity, and vol contexts continued to gnaw away at the bullishness of every talking head. Shifts in CMBX tranches point to growing fears of systemic concerns in MBS markets and the up-in-quality trade (or up in capital structure) is in full force.

Equity underperformed credit as HY put in its worst close-to-close widening in two weeks and filled the gappy gamma-driven chasm from last week. CMBX activity starting to signal systemic fears perhaps and a pick up in vol skews (downside protection bid) remain worrisome as so many under-currents indicate less than stellar confidence.

Stock and credit markets closed weaker today as Europe came back to the party from their long weekend. Equities underperformed credit (beta-adjusted) and HY underperformed IG as we see the debt-equity relationship starting to wave caution flags and skew compression enabling some downside.

Stocks and spreads lost ground today following an ebullient pre-open and relatively stable start as early up-in-quality themes played out. Breadth in credit was positive but low beta considerably outperformed high beta and there was notable net selling in the secondary corporate bond market especially in the Financials and Consumer NonCyclical sectors.

While stocks seemed in a world of their own today relative to Treasuries, FX carry, PMs, oil, and even the USD, they managed to make solid gains amid above average volume following a series of dismal macro prints this morning. Credit outperformed but we outline why the velocity of moves may slow a little here.

Stocks ended the day higher, though off their highs, handily outperforming the HY and IG credit markets as the FX and PM markets exploded in the afternoon around Bernanke’s press conference. Divergence between high and low quality credit and equity suggests releveraging is starting to be priced in.

Equities (unch) managed to algorithmically outperform credit (wider) and un-sync from correlation and vol on the day amid rather tepid conditions. Up-in-quality remains in cash and synthetic credit and protection in vol seems bid again (for now).

Headlines will crow of the strength in equities and credit today. However, the lack of high beta participation in credit, the underperformance of financials, and the clear continuation of the somewhat more risk-averse up-in-quality trade in credit and equity markets remains a concern.

S&P futures managed to creep up to the pre-USA outlook change lows of early yesterday amid the lowest volume day in over two weeks and while HY and IG credit also managed gains on the day, we note some interesting shifts under the surface that should be considered less sanguine.