Equity Markets

European corporate and financial credit markets are opening weak this morning - ignoring the exuberance in overnight ES futures (11,000 contracts in seconds on rumor of China for 10pt jump?) which is also leaking back rapidly to VWAP (even as European equity markets continue to levitate). Financials especially are now beyond yesterday's wides with subordinated spreads the underperformer for now. This extends from our comments yesterday that were picked up on CNBC with regard to the 'stigma-trade' in LTRO-encumbered banks (which is widening further this morning) as well as broad divergence between stocks and credit. Concerns over Ireland's fiscal consolidation plans balanced with a very slight beat on German GDP (though still negative) are seeing EURUSD leak back off its best levels of the night after it bounced off 1.31 in late US trading (on Samaras rumors then extended by this China chatter). Gold and Silver are pushing higher while Copper and Oil are stable for now (though notably up from yesterday's European close). European sovereigns are quiet for now while US Treasuries are slightly better bid.

Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.

We have been warning of the bearish divergence in European credit markets all week and today saw that trend continue as the best-performers of the year-to-date become the biggest losers on the week. Financials and high-yield (crossover) credit have dramatically underperformed this week (with XOver +50bps touching 600bps once again) as credit overall trades considerably wider than before the NFP-print jump. Investment grade is wider but diverging a little today as decompression trades are laid back out and up-in-quality trades are reconsidered - and away from financials which have seen their senior unsecured credit spreads jump from under 190bps to almost 220bps on the week. Broad equity markets in Europe also saw their worst week of the year but are lagging the credit sell-off for now and sit (for context) right around the pre-NFP jump levels. Sovereigns were mixed on the week with the last couple of days seeing notable deterioration. Spanish spreads are +33bps, Italian spreads are -9bps on the week but are 25-30bps off their tights but it appears Portugal was the darling of the ECB this week as it managed an impressive 100bps compression (10Y now almost 500bps off its wides on 1/30) but this impressive tightening only gets the peripheral nation back to 1050bps (and mid-January levels - still triple the level of risk of a year ago).

Credit markets are continuing the trend of the last couple of days with this afternoon seeing their underperformance accelerating. Major underperformance this week in investment grade and high yield credit markets relative to stocks (and as we noted this morning, we are also seeing financial credit in Europe notably underperforming) as Maiden Lane II assets are sold and high yield issuance peaks (and liquidity dries up). Adding to the concerns, VIX futures saw their biggest 2-day jump in over two months despite equity's modest rally. On a day when Pisani tells us there was much to rejoice about, stocks managed only negligible gains (even with broad risk assets in risk-on mode, TSY yields up, FX carry up, Oil up) and while stocks are limping higher now (aside from AAPL of course) with financials underperforming, perhaps this week of notably higher average trade size in equity futures is the calm before the real storm gets going - as credit and vol seems to be hinting at.

FX Concepts' John Taylor is out with today's slam dunk de-noisification of all that is irrelevant with the following summary of what is really going on as the world's central banks embark on the latest and hopefully final attempt to reliquify everything. All we can add to Taylor's analysis, especially in light of today's incremental easing in ECB collateral requirements, is that the biggest beneficiary by far of what in a few months will be another multi-trillion balance sheet expansion, is and continues to be hard, non-dilutable, i.e., real, money. Because as fiat currency loses all relevance in a world in which it is printed on a daily basis by the central banks, whether or not we end up with a Weimar scenario, the cash thrown out by the even profitable companies will be increasingly more meaningless. Yet the take home message is that banks will never, ever stop diluting existing money. They simply can't as the past few months have so vividly demonstrated.

Somehow, once again, we managed to rally EURUSD (to 2 month highs) on the back of Greek deal hopes (even as Merkel stomped her feet, Hollande flexed his muscles, and Dallara/Venizelos had nothing to report) which maintained a modicum of support for equity markets (which also got a little late day push from another record-breaking Consumer-Credit expansion) as cash S&P made it to early July 2011 levels. Unfortunately, with Utilities leading S&P sectors, credit diverging wider in investment grade and high-yield, Copper underperforming (post overnight China reality checks), WTI's exuberance (relative to Brent at least), and implied correlation diverging bearishly from VIX, we can't say this was a wholly supported rally. Broad risk-asset proxy (CONTEXT) did stay in sync with ES (the e-mini S&P 500 futures contract) after the European close as Treasuries held up near the day's high yields and FX carry stabilized. Financials lagged with the majors actually underperforming for a change as we note the late-day surge in ES to new highs saw significant average trade size suggesting more professionals covering longs into strength rather than adding at the top. Volume was above yesterday's dismal performance but remained below the year's average so far. Credit and equity vol are back in line and credit has now been flat and underperforming for the last three days (even as HY issuance has been high).

Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.

We are struggling for superlatives (or whatever the antonym for superlatives is). Today's NYSE volume is as low as we could find on Bloomberg data. It is the lowest non-holiday trading day volume in over a decade. This is 26% below last year's post-Superbowl trading day volume. ES, the e-mini S&P 500 future contract, which has tended to be the most liquid and heavily traded instrument reflective of the equity markets, traded around 1.19mm contracts versus a 50-day average of 1.83mm (down 35%) and also we were struggling to find a non-holiday trading day with lower volumes (lower even than on the Thanksgiving Friday of last year's volume). Using our trusty Birinyi ruler and extrapolating the trend since the March 2009 crisis lows, we see No-Volume-Day (NV-Day) as being celebrated on the NYSE in September 2015 (we assume valuations are being adjusted on financials and exchanges as we speak).

Zero Hedge has not been focusing much on the topic of our broken equity markets recently because if by now, following over three years of coverage, someone is not aware just how fragmented, manipulated and largely broken the market truly is, they never will. Yet every now and then it worth reminding readers who may have stumbled on this blog recently, just how bad things are in graphic format. Our friends at Nanex, who are by far the best forensic analysts of everything that is busted with the US stock market, have completed a masterpiece analysis showing the churning (packet traffic) in the various fragmented US market venues, from the NYSE to the Nasdaq to BATS and so forth, on a daily basis beginning in January 2007 and continuing through today. While the "rise of the HFT machine" over the past 5 years, following the adoption of Reg NMS, will hardly be a surprise to most, what is stunning is the first animated confirmation of the market terminally breaking on August 5, 2011, the day the US was downgraded, an observation that first was made right here on Zero Hedge. Which begs the question: what really happened in the stock market on August 5, 2011 when the US was downgraded to AA+, when everything literally broke, who is intervening constantly in the stock market, and why are they doing so via various HFT intermediary mechanisms?

With the impending March 20th maturity GGBs trading at 1400% yield (or 36% of par), EURUSD trading at 1.31, and European financials (and Greek financials explicitly) all up considerably, one could be forgiven for confusion as to what is priced in and what is not. As Bank of America (BAML) noted earlier in the year, believe it or not, Greece remains a blind spot and that risks from Greece are not fully priced in. Summarizing the deep cuts that Greece is expected to make - the Troika is demanding fiscal measures of 2% of GDP in 2012 - BAML points out that while they believe a common ground can be found, the asymmetric risks of a disorderly default could weaken the EUR well below their projection of 1.25 in the first half of the year. Certainly, while Greek sovereign bond markets seem priced for inevitable default (as real cashflows still count in the credit markets), FX and equity markets seem to be jumping-the-shark of the crisis - Europe will be stronger without Greece and Fed will backstop inevitable crisis - and missing the interim crisis conditions (Lehman-moments) that will occur as tail-risk scenarios and social unrest (that LTRO seems to have assuaged for now in people's minds) could return rapidly across the entire region. With frustration growing between an impatient Troika (that faces total humiliation, moral hazard, and ugly precedents for others) and a stubborn April-election-facing political class in Greece (along with the inability of the PSI to get done for all the reasons we have discussed in the past - foreign law bonds, basis traders, hedged positions, hedge fund sovereign litigation arbs) it seems the Troika has the most to lose for now seemingly holding a gun to their own head (as once again a massive ECB intervention might be needed with all its knock-on effects on the Fed's balance sheet expansion).

Weekend talks between Greek government officials failed to reach a definitive conclusion and as such market sentiment has been risk averse across the asset classes. The equity market has been chiefly weighed upon by the banking sector and as such underpinned the rise in fixed income futures. However, recent trade has seen a slight pullback led by tightening of the French spreads on reports of good domestic buying noted in the belly of the French curve. Today marks the deadline for Greece to provide feedback as to the proposed bailout terms put forth by the Troika, but with continued disagreement on the fine print in the additional austerity proposals, market participants remain disappointed in the lack of progress. Of note a PASOK spokesman has said that Greece should not hold a general election after clinching an agreement on a second bailout package, suggesting instead an extension of Lucas Papademos' tenure. However, the two main unions of Greece have called for a 24hr strike on Tuesday. Looking ahead there is little in the way of major US economic data today so Greece will likely remain the dominant theme for the rest of the session.

With the world ever more lethargic daily, as if in silent expectation of something big about to happen (quite visible in daily trading volumes), it is easy to forget that just about a year ago the Mediterranean region was rife with violent revolutions in virtually every country along the North African coast. That these have passed their acute phase does not mean that anything has been resolved. And unfortunately, as BMO's Don Coxe reminds us, it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix. As Coxe says: "Today, the Mediterranean is two civilizations in simultaneous, rapidly unfolding crises. To date, those crises have been largely unrelated. That may well be about to change." Coxe bases part of his argument on the same Thermidorian reaction which we have warned about since early 2011, namely the power, social and economic vacuum that is unleashed in the aftermath of great social change. But there is much more to his argument, which looks much more intently at the feedback loops formed by the divergent collapsing economies that once were the cradle of civilization, and this time could eventually serve as the opposite. To wit: "The eurocrisis has been front and center for nearly two years, during which time the economic and financial fundamentals have continued to deteriorate. “The Arab Spring” came suddenly, in a series of outbursts of optimism. It may have come at the worst possible time for the beleaguered nations of the North Shore. The Mediterranean has entered one of the stormiest periods in recorded history. It is the major contributor to risk in global equity markets. It is too soon to predict how these crises will end. The Cradle of Civilization is rocking amid an array of winds and storms. “The Arab Spring” ...may have come at the worst possible time for the beleaguered nations of the North Shore."

Whether it was FX majors, the Treasury complex, or the economically-sensitive commodity markets, the 'negative' shift from yesterday's open (USD up, TSY yields down, Commodities down) plateaued overnight and retraced throughout the day today. Equities and credit however managed to make new highs (while all these other risk-related assets did not) as they stayed in sync for the afternoon (double-topping on lower volume) as financials outperformed (MS +5% for example) on what we can only imagine was Greek rumors (which later proved as usual to be completely false). Oil dropped markedly into the close, heading for $97 as Gold remains the week's winner (though Silver and Copper won on the day). The USD is flat (leaking higher in the late day) to yesterday's pre-market after trying and failing at 1.32 against the EUR (which is the underperformer vs USD on the week for now -0.48%). Treasuries sold off, adding 3-7bps across the curve (though still lower yields on the week) and while 30Y underperformed, 2s10s30s did not move much as the rest of the curve pivoted. The last 30 mins of the day saw ES pull back from its lonely highs to test VWAP (and IG and HY credit also fell with it) as open to close, credit underperformed, and cheap hedge IG was moving more negatively than beta would suggest. By the close, ES had pulled back (lower) to converge with CONTEXT (proxy for broad risk assets) and fell below VWAP as once again average trade size picked up significantly to the downside.

Back in January 2010, when in complete disgust of the farce that the market has become, and where fundamentals were completely trumped by central bank intervention, we said, that "Zero Hedge long ago gave up discussing corporate fundamentals due to our long-held tenet that currently the only relevant pieces of financial information are contained in the Fed's H.4.1, H.3 statements." This capitulation in light of the advent of the Central Planner of Last Resort juggernaut was predicated by our belief that ever since 2008, the only thing that would keep the world from keeling over and succumbing to the $20+ trillion in excess debt (excess to a global debt/GDP ratio of 180%, not like even that is sustainable!) would be relentless central bank dilution of monetary intermediaries, read, legacy currencies, all to the benefit of hard currencies such as gold. Needless to say gold back then was just over $1000. Slowly but surely, following several additional central bank intervention attempts, the world is once again starting to realize that everything else is noise, and the only thing that matters is what the Fed, the ECB, the BOE, the SNB, the PBOC and the BOJ will do. Which brings us to today's George Glynos, head of research at Tradition, who basically comes to the same conclusion that we reached 2 years ago, and which the market is slowly understand is the only way out today (not the relentless bid under financial names). The note's title? "If 2011 was the year of the eurozone crisis, 2012 will be the year of the central banks." George is spot on. And it is this why we are virtually certain that by the end of the year, gold will once again be if not the best performing assets, then certainly well north of $2000 as the 2009-2011 playbook is refreshed. Cutting to the chase, here are Glynos' conclusions.

Following three-in-a-row weak macro prints, the market broadly speaking is not happy. The S&P is 10 points off its pre-Case-Shiller highs, EURUSD is dropping rapidly back towards 1.31, Treasury yields are falling 3-5bps across the curve, and Commodities are giving back their spike gains from pre-US day session open. FX carry seems like a major driver for now with AUDJPY and EURJPY most notable while the drop in the curve and levels of the Treasury complex are adding to downward pressure on stocks. Credit and equity markets are dropping in lockstep for now (with HYG more volatile than its peers). The rally in European sovereigns has stalled here as longer-dated spreads are now widening off their intraday tights (10Y BTP back up to 6% yield) while PGBs give back some of their ECB-enthused rally (~20bps off tights now). US equities and CONTEXT (the broad risk proxy) are in line as they drop here.