In his latest note, Jefferies' David Zervos observes something that has been troubling us for the past few weeks as well: namely, whether the relentless plunge in the EURUSD, now down nearly 600 pips from when we said the next EURUSD target could be 1.20, coupled with a far tamer drop in various US equity risk indicators, such as the S&P, means that the EURUSD/SPOO correlation, so well known to most traders, has finally broken down. We doubt it. In fact, we believe that being LONG EURUSD (potentially with an offseting SPOO short for a less balance sheet intensive pair trade) which will easily rip 400-500 pips in the current environment, could well be the ABX trade of 2012 for some lucky trader. There is just the minor matter of timing...
Excuse a rant...
Depending on whether you look at broad liquid risk markets or narrow manipulated 'repressed' illiquid markets, your take on today's European action will be different. Equity markets were crushed. Corporate and Financial credit spreads blew wider. Volatility (Europe's VIX) exploded over 36%. So far so good? But Italian and Spanish bonds rallied. It seems EUR96 was the line in the sand that the ECB (or their proxy banks) decided was enough for Spanish 10Y bonds and that was where they were defended to (though we are suspicious why ECB would step in now after 4 months absence). There was eventually some notable divergence between underperforming Spain and outperforming Italy by the close (+40bps on the week vs +27bps). We suspect that much of the sovereign outperformance was a combination of Sovereign CDS-Bond basis traders (buying bonds and buying protection in Spain to lock in that wide spread) and a replay of the short financial credit, long domestic sovereign credit trade (as in banks will underperform the sovereign if things hit the fan/wall). That is the flow that was evident when looked at across markets. All in all, a terrible end to an awful week and hopefully we have helped explain why sovereigns outperformed (technicals) as CDS remain at wides and stocks at lows.
Just about an hour before the US non-farm payroll number is expected to print, and finally resolve the lingering question whether the Chairman will print in 3 weeks, things in Europe have gone from horrible to zombie. A series of horrendous economic reports out of Europe including record Eurozone unemployment, a confirmation of the final European PMI plunge including the second largest monthly decline on record in UK manufacturing, and various soundbites from Syriza's Tsipras, have pushed the EUR to fresh two year lows, Spanish CDS to new all time wides German 2 Year bonds joining Switzerland in negative terriroty, and finally, Bloomberg, as noted earlier, to be "testing" a placeholder for a post-Euro Drachma. As BBG summarizes: "European markets fall, led by consumer & tech stocks with the German market underperforming. The euro falls against the dollar and German 2-yr yields drop into negative territory. Chinese manufacturing PMI data below expectations, though above the 50 level; European manufacturing PMI in line with expectations, below 50. Euro-zone unemployment met expectations and seems likely Irish voters endorsed the EU fiscal treaty. Commodities fall, led by oil & natural gas. U.S. nonfarm payrolls, unemployment data due later." In summary - all data today fits with Raoul Pal's less than optimistic presentation from yesterday.
Well, they sold in May but did they go away? If today is any guide, they did as the swings across asset classes intraday were very reminiscent of 'death rattles' with trading scenarios becoming more and more binary and more and more extreme. Into the US macro data this morning risk assets in general were behaving in a synchronized manner. As the dismal data hit, it got wild with gold and stocks gapping down and Treasury yields crashing lower (10Y 1.53 handle!) only to be saved around the European close by chatter of IMF aid for Spain (funded by the selling of unicorn tears) at which stocks erupted (and while bonds, the USD, and Gold also reacted - they were far more muted). The afternoon was quiet until stocks had a mind of their own and went on a stop-hunt up to yesterday's late day highs (and that magical 1315 level) - pulling well away from any other asset-class reality - only to fail dismally, ending with an abrupt tumble back to sanity (just slightly in the red for the day) grabbing VWAP into the close. The signals were everywhere that risk was not 'on' no matter how hard stocks tried with high-yield credit (most notably the ETFs) surging and purging ending with a terrible dive (after popping up to VWAP after our earlier note) on heavy volume.
If we had a penny for every equity rally away from credit reality that converged back to credit's less-hopiness, we would now have made 5 pennies in the last 6 trading days. We pointed out last night that equities surged into the close on small average trade size as credit remained far less sanguine and the now-ubiquitous open in Europe started the reversion as stocks fell rapidly, below Friday's close - tracking back with high-yield credit's deterioration. HYG gave up yesterday's gains and pops back under fair-value but rather notably, investment grade credit (IG) underperformed significantly today - which is unusual in a sell-off day and signals either more fallout from JPM reaching for hedges (IG9 10Y 166bps offered +5bps) or investors grabbing the cheapest macro overlay from a carry perspective. Gold and Silver outperformed admirably on the day, however the upward move appears to be more of a reaction back to equity, treasury, and USD reality as the afternoon saw the 4 markets recouple and trade together (after disconnecting notable yesterday). Treasury yields dropped the most in 7 months to new record lows in 10Y and close for 30Y. Both implied correlation (systemic risk) and VIX (normal vol) jumped higher today as the latter moved almost 3 vols to close above 24% (its biggest pop in almost 3 months). A heavier volume open at highs, close at lows day for stocks with little to signal capitulation in terms of trade size - and across broader risk-assets, stocks appear to have room to fall - even after ES suffered its worst loss of the year today.
The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice - as if spoken by the most-interesting-person-in-the-world - "Stay nimble", my friends.
UPDATE: EURUSD at 1.2478 as we post.
While European, US, and commodity markets (ex-Spain) were enjoying the hope/hype of ECB rumors and QE chatter, Egan Jones just burst the bubble. back to reality. Within minutes of their downgrade of Spain, EURUSD was plunging faster than Facebook and along with that cornerstone of correlated risk markets, gold, silver, oil, copper, and US equities had smashed lower.
Futures are well bid overnight even though following a modest short covering squeeze of the new record number of EUR shorts, the primary driver of risk, the EURUSD is now back to mere pips above its 2010 lows. It is somewhat confusing why equities are so jubilant about what can only be more imminent bailouts, following statements by the ECB's Nowotny who made it clear that the ECB is not discussing the renewal of bond purchases and that the central bank provides "liquidity not solvency." Adding to the confusion was a release in Chinese daily Xinhua which said that China has no intention of introducing large scale stimulus. All this simply means that the only possible source of liquidity remains the Fed, whose June FOMC decision could make or break the global stock markets, pardon economy, and why this Friday's NFP print is so critical. Absent a huge miss, it will be difficult to see the Chairman pushing through with another $750 bn-$1 trillion in LSAP. Which Europe desperately needs: first we got Italy pricing €8.5 billion in 6 month bills at much worse conditions than April 26, with the yield rising over 2%, or 2.104% to be precise, compared to 1.772% previously, and a BTC of 1.61, declining from 1.71. More importantly, the Spanish economic deterioration gets even worse after Spain just recorded a record (pardon the pun) plunge in retail sales. From AP: 'A record drop in retail sales added to Spain's woes Tuesday as the country struggles to contain the crisis crippling its banking industry and investors remained wary of the country's ability to manage its debt. Retail sales dropped 9.8 percent in April in year-on-year on a seasonally-adjusted basis as the country battles against its second recession in three years and a 24.4 percent jobless rate that is expected to rise. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent fall posted in March, the National Statistics Institute said Tuesday." So all those focusing on the Greek economic freefall may want to shift their attention west.
Aside from Spain (-0.3%) and Greece (-11.8%), European equity markets are ending the week green - albeit marginally - as we can only assume the hopes and prayers of every banker are being discounted into the price of corporate liabilities (an 'event' will happen but don't worry as the ECB/Germany will cave). Corporate and financial credit markets also ended the week tighter - with financials the high beta players on the week, hugely outperforming on Tuesday but fading into today's close. Today was not a pretty end to the week in credit though as both sovereigns, corporates, financials, all peaked early in the day and pushed to near their lows by the close. Senior financial bond spreads actually closed wider on the day - at their wides - and Spanish sovereign bond spreads exploded over 35bps wider from earlier tights to end at theu widest since April 1995. Italian bond spreads also jumped 32bps wider from their morning tights but end the week -9bps and France gave back almost half its sovereign bond gains of the week today. EURUSD remains the story, breaking below 1.2500 for the first time since early July 2010 as it seems the FX markets remain much less sanguine of the endgame here than do equity markets (with sovereign credit getting closer to FX's world view and corporate credit closer to equities but fading today). Europe's VIX remains above 30% (though our VIX-V2X compression trade is performing well as US VIX elevates).
There's been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science. Like Tolstoy's comment about families, every "Happy" IPO is essentially the same, while every miserable one is different in its own way. There are rules to the successful IPO, and today we offer up ConvergEx's Nic Colas' manual, a step-by-step checklist for investors to assess if an offering is on track. From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce "teach-in" to final pricing is narrow but well-marked.
Not like this will come as a surprise to anyone in the aftermath of last week's abysmal FaceBook IPO which pretty much killed all retail interest in equity markets, but in the last week, the "dumb" money pulled another $3.5 billion out of domestic stocks per ICI, bringing the total tally to 13 consecutive weeks of outflows, and 52 weeks of outflows in the past 56 weeks, with redemptions amounting to $46 billion in 2012, compared to just $6.5 billion for the same period in 2011. Algo-matic, the 20 remaining Primary Dealers and whatever hedge funds are left can pass hot grenades amongst each other: the retail money (RIP) has found other ways to amuse itself.
Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development. This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action. Instead, what has happened is that the global ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of Central Bank money. The debt burden is too large, the mal-investments too pervasive, the corruption too systemic. The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing. So what do you think they are going to do? If I am correct, and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental Central Bank policies. The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing. They are way behind the curve and by the time they realize this it will be too late to stem the momentum. That said, I do expect them to respond and the fact that things will have gotten much worse than they expected will mean a major response. I’m not talking operation twist part deux. I mean a serious print. Potentially the BIG ONE.
Having hit its highs in the pre-open, equity markets drip-drip-dripped lower all day, retracing their late-day exuberance relative to credit markets and broad risk-assets by the middle of the afternoon. Even financials had given back almost all of their post 230ET ramp yesterday but then - IT happened again. Italy's Monti made the same technocrat-fed comments as yesterday and financials take off again leading stocks higher (only to come back 10 minutes later and back-pedal on his hard facts). This time though - was different. Yesterday's rumor-ramp added 2.5% to XLF (the financials ETF) but this time it only managed to spur a 0.5% gain before the effects faded. Coincidentally - the ramp pushed ES (the S&P 500 e-mini futures) up to VWAP where sure enough we saw heavy volume with large average trade size step in to briefly stall the rally - which then managed to push on to near the day-session's highs (but notably all on its own again). ES very much repeated the same pattern as yesterday but with lower average trade size still - ending the day exuberant but on its own. The USD kept pushing higher though - with the divergence with stocks now very large - (as EUR leaked lower - even as AUD rallied on the rumor-ramp) but this USD strength did not weigh as angrily overall on commodities today. Late Europe rumors of another LTRO pushed stocks up and dragged gold and silver up rapidly but they all gave it back by the close. With the USD up 1.5% on the week, Oil, Copper, Gold, and Silver are in the same currency-driven range between down 1.25 and 2% on the week - perhaps suggesting yesterday's plunge in PMs has seen a short-term end to the liquidation factors (though for how long). Into a long weekend, it seemed volume remained decent enough but once again average trade size was very low (suggesting little conviction here and/or algos giving pro-size exits). Treasury yields rose all day (ending higher by 3bps or so) pulling back to near Tuesday's closing levels. VIX tracked down to 21.5% (losing less than 1 vol on the day) and is once again cheap relative to credit/equity's view.
While we were told during the PSI process that all was fixed and that Greece now had breathing room to cut spending and meet its TROIKA-mandated targets on the road to glory, it appears - just as we said it would - that things have got worse (much worse). In the 44 trading days since the PSI deal was struck, Greek government bonds are down over 44% in price - trading below 12% of par today for the first time ever. So much for Greylock's "no-brainer", "trade of the year" eh? Did equity markets signal an expectation of hope and change even as the government's largesse was priced into its debt? Not so much - the Athens Stock Exchange index is down an incredible 35% since 3/22 - back at 22 year lows! Where is the Greek Whitney Tilson when we need him most?