Calm Before The Storm? Credit Plunges As VIX Futures Jump Most In 2 Months
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.
High yield credit (light red) has now been leaking dramatically for a few days. Investment grade credit (dark red) also started to crack this afternoon as ES (the e-mini S&P futures contract) in blue managed to creep up to new highs once again. HYG (green) has a major stumble in the middle of the day (red oval) but was 'rescued' to close higher - though ended with a stumble.
Volumes in ES and NYSE were around average but we note that yesterday saw the highest average trade size in ES since 7/28/11 - the top of the crash slide coincidentally. Is retail about to be left holding the bag again as the professionals exit into strength?
Perhaps it is coincidence but the event that stumbled credit and then equity markets initially last summer was the attempted and failed sale of Maiden Lane II assets. We note that Goldman lifted out some of that trash this week from the FRBNY and held it on their books - suggesting they got it 'cheap' if you know what we mean. Maybe hedgers are out looking for protection as they worry new marks are in place for those CDOs?
VIX futures saw their biggest 2-day jump in two months and nearly the biggest since the Thanksgiving Day rally began in earnest. By the close VIX futures had jumped 5% or over 1 vol over the last two days.
JPY and EUR were the key features of today's FX market with the former managing to reach 1.33 before the European close and then wiggle sideways for much of the rest of the day (ending up 1% on the week so far). JPY leaked lower once again, now down 1.4% on the week
Treasuries ended off their highest yields of the day with modest steepening on the day as 30Y underperformed (though was better off the auction). 10Y is the major underperformer on the week (mortgage convexity?) and is up 11bps while 30Y is up only 6bps. Even the short-end managed some losses with 2Y up 3bps on the week so far. 2s10s30s - a popular risk driver - is up an impressive 23bps from Friday's close at 63bps and has helped support the risk-on rally in stocks.
Commodities diverged from just before the European close with Oil and Copper ending at their highs holding gains while Silver and Gold leaked back to the day's lows to close more in sync with the USD weakness on the week. All ECO-sensistive commodities are still up on the week with WTI nudging $100 again and outperforming +1.9% and Gold +0.2% (against USD -).4%).
In the words of one of the best equity/credit traders we know (h/t Andy Y) "Someone pooped in the pool but not everyone has seen it yet".