USD Surges By Most In 7 Months As Stocks Stumble And Bonds Bid

Tyler Durden's picture

Keep Calm and Keep Buying. We are sure this will be the message as for the first time this year, the Dow closed the week in the red. First time in 42 years that the S&P 500 started the year up six weeks in a row... as the S&P and Nasdaq managed modest gains (thanks to AAPL's help) - making new multi-year highs as yet another high stop-run was sent out early. After testing back under 13%, VIX popped back higher in the afternoon to close the week slightly higher. However, while stocks stumbled along sideways not really doing anything - every other asset class saw significant risk-off related moves. The USD saw its biggest weekly rise in 7 months! Treasury yields dropped 6-8bps - the biggest rally in bonds in 5 weeks. High-yield credit has suffered its biggest 2-week plunge in 9 months. WTI Crude saw its biggest weekly drop in 2 months. Given the USD strength, gold performed very well (ending the week unch). Stocks remain significantly dislocated from credit, rates, and FX markets in the medium-term (all of which closed the week with a risk-off shift). Volume, amid the blizzard, was dismal today.

 

 

Been a divergent week in risk assets...

 

as stocks just storm away from their risk-related brother in credit...

 

The USD surged by its most in seven months this week!

 

as the EUR lost 2% against the USD this week (and JPY is unch)...

 

HY Credit has seen the biggest 2-week drop in nine months!

 

Stocks ended the week notably out of line (short-term) from risk-assets - but all of the stock buying was early as the rest of the day saw risk in general being sold (as rates and the USD rallied and credit sold off). VIX and Stocks clung close together once again but VIX term structure steepened to its highest in a month...

 

 

While tracking the optical difference between credit and equity markets is useful...

 

...the relationship is notably non-linear. However, Capital Context provides a more useful tactical model to ascertain the separation between stocks and credit - for now, as the charts below show - stocks are 2.5 to 3% over-valued relative to credit (but bear in mind that as and when stocks correct, credit will also be offered and the mispricing can exacerbate). For now, the S&P 500 and Russell remain notably rich... suggesting market neutral positioning for any long book.

 

and of course, fundamentally, things do not look too supported here...

 

The major indices saw some heavy blocks go through into the last few seconds and AAPL was fading off its intrday highs - but today's volume was 20% below average.

 

In case you were wondering what was catching stocks each time they dropped - it appears (for now) that convergence trades with the old favorite 2s10s30s Treasury butterfly have been doing well...

 

Charts: Bloomberg and Capital Context

 

Bonus Chart: It seems once again that what European banks lose, Apple gains as the two fulcrum securities of the world look to be converging once again...