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...

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flow5's picture

The Fed's technical staff figured most of this out long ago:

In 1931 a commission was established on Member Bank Reserve Requirements - The commission completed their recommendations on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal"

It's 2nd proposal: "Requirements against debits to deposits"

This research paper was DECLASSIFIED on March 23, 1983. By the time this paper was declassified, required reserves had become a "tax" [sic].

 

flow5's picture

Friedman is an old dead punk. He thought CB reserves were a "tax". A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money. (prior to the intro to IOeR), if the Fed put through buy orders in the open market, the Federal Reserve Banks acquired earning assets by creating new inter-bank demand deposits. The U.S. Treasury recaptured about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn't earn any interest on their balances in the Federal Reserve Banks.

On the basis of these newly acquired free reserves, the commercial banks created a multiple volume of credit & money. And, through this money, they acquired a concomitant volume of additional earnings assets. How much was this multiple expansion of money, credit, & bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

Venerability's picture

Is this a recycled thread from 1997?

In any case, not very effective as a BOO!

I don't think there is ANYONE in the entire world who is not furious with Japan - other than the (very loud!) Momo currency traders.

The Chinese are beyond furious.

And many in the US are seething less than secretly, too.

I think the upcoming G-20 meeting is going to be one of most contentious on record. And the Russians running it will add possibly much fuel to the fire.

So let us see what we shall see.