Commodities And Rates Lead Derisking Afternoon

Tyler Durden's picture

High yield credit spreads were the first to show signs of disappointment this morning but this seemed more due to technical relationships in the CDS index market as HYG stormed ahead with stocks. Commodities had notably cracked early on this morning and were trending lower already as we broke the FT rumor of broad S&P downgrades in euro sovereigns. All markets reacted instantly, no questions asked, and while IG, HY, and the S&P dropped together, it was the drops in commodities as the USD strengthened that were optically of the highest magnitude. TSYs also instantly reacted and were another major outperformer - drastically beating Bunds on the day. ES (the e-mini S&P 500 futures contract) was much less volatile than broad risk assets overnight but as Europe opened markets started to move closely together in a positive risk mode. CONTEXT (the broad risk basket) was less positive that ES in the US morning session but as we sold off and closed they were closely in sync once again as every member of the basket was contributing to risk aversion. Financials outperformed but were well off their intraday highs as a sector with the majors closing mixed (e.g. BAC near lows and MS near highs) but we note that financials were the most net sold (especially the majors) in corporate bond land.

Some late day covering lifted 30Y TSY yields and EUR strengthened against the USD (European banks repatriating ahead of their open?) helping CONTEXT and elevating ES into the close. ES was on its own relative to credit though as it tore back up to try and regain VWAP.

ES and broad risk assets (CONTEXT) generally stayed in sync and the late day surge in ES was accompanied most clearly by 30Y weakness and EUR strength (did Europeans get a late night call?).

It was certainly notable that 30Y stood out in the sell-off relative to the rest of the curve in that last few minutes. In corporate bonds, HY bonds were net bought (which means buy-side clients bought more FROM dealers than they sold TO dealers) and IG bonds net sold. This HY buying perhaps fits with the HYG moves also (as dealer inventory deleveraging is increasingly dwarfed by ETF and mutual fund flows). Most notably, Financials (which were the clear winners in stocks) saw major net selling in bonds - dominated by the majors - and this was not TLGP paper - this was further out the curve.

Credit (IG and HY) did not participate in the last minute surge up in ES as it tried to get back to 1258 (VWAP).It almost exactly hit it (see chart below - solid red line) and then retraced back down right as we closed.

Once again HYG outperformed both stocks and HY spreads and HY spread weakness (due potentially to index arbitrage) was not enough to explain the weakness and we grow increasingly concerned at HYG's richness to NAV and momentum-like characteristics as what looks like retail chases it up here.

If we didn't know better we would expect a margin hike in Silver tonight but it was clear that commodities were not bid even before the S&P rumor/news. Silver is now down almost 2% from Friday's close as Oil stays much closer to the USD moves.

Chart: Bloomberg and Capital Context

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
hugovanderbubble's picture

thx for daily analysis.

Its impossible to modelize a Broken market activity...(At least i cant)

HedgeAccordingly's picture

i second that.. nice technical analysis combined with commentary -

Ahmeexnal's picture

sounds like war drums

Stack Trace's picture

Scratching head....

ISM Misses

Factory Orders Miss

S&P Announces downgrade watch for 17 EZ countries

Euro down

...but...but.... EQUITIES ROCKET lead by Financials because.... because Merkel and Sarkozy have agreed to not agree completely. WTF


This market is beyond retarded...or...there is information some folks have the rest of us don't...yet and the VIG is in.

Cult_of_Reason's picture

I am as perplexed as you are. In particular about a huge Italian and Spanish bonds rally today (short covering?).

I am afraid there is information PDs know (from Bernanke/Geithner/White House) that the rest of us don't.

Scalaris's picture

I know how you feel.

So I suggest you start drinking.

Stack Trace's picture

Going rock climbing instead. Hopefully that keeps my mind off this mountain of utter BS.

I long for the good old days when the liars kept their lies a secret.

Scalaris's picture

Fckng Twitter's fault.

Also, as the bullshit avalance progresses, I recommend a switch to a more projecting sport such as kickboxing. 

BlueStreet's picture

This market blows chunks. 

Logiclee03's picture

Naaaah....just buy more gold, water, generator, mre's, whale oil for lamps....rinse and repeat for next subject....oh for got...short S&P then post a link to youtube calling 9/11 an inside job>>>>

WhiteNight123129's picture

The whale oil is to rub your chest you idiot! And Bin Laden was a gold bug, damn moslem pinko gay gold bug !

Caviar Emptor's picture

Wanna know what "The Solution To The Euro-Crisis" is gonna be? 

It will be a political solution more than an economic one. That's what Merkozy was saying this morning. The die is cast, and it'll be coming to a country near you. 

If you can't stimulate the economy, if you can't create real growth and enough employment, you must suppress the infighting and clamor for truth and justice. 

Pentagon project lets police forces – even in small towns – arm themselves with military gear

centerline's picture

Yup. Just a matter of time. And folks think freedoms are getting thin now. Just wait.

Caviar Emptor's picture

Sadly I agree. But it looks like people aren't putting up much resistance either. Reminder of 1930s

aleph0's picture


Surprise piece from Spiegel Online.

From Spiegel-Online : Thorsten Polleit, chief economist at Barclays Capital

Title : Should we abandon the euro?

Thorsten Polleit : “The euro needs to assert itself against gold and silver”


Google translation:,1518,800926-3,00.html

SheepDog-One's picture

MUST....hold....magical DOW 12,000.....must close.....higher... 

Logiclee03's picture

Big time sell off in Asia.....OMG!!!

while they're getting their eyes narrowed over there.....don't forget....just buy more gold, water, generator, mre's, whale oil for lamps.......oh forgot...short S&P then post a link to youtube calling 9/11 an inside job>>>>


magpie's picture

Or Asia prints ?


Wonder if MF would have accepted that kind of steal later.

Mike2756's picture

Time for the boj to slap the yen down again.

chump666's picture

huh?  Look Asia has being selling for mths, Wall Street has lost the plot on Obama taxpayer fleecing and the FED (Bernanke looks phycically ill) already starting QE3 with OP Twist and the MASSIVE swaps to Europe and the IMF.  Ok, Asia goes via China, boom, Wall Street gets taken out hard this time.  Europe is dead.  Merkel and Sarkozy can solve nothing.  Point is, the end game is very, very close.  Markets will start to sell hard into 2012.  The Fed/ECB will start to official announce their new QE measures.  Too late.  China blows up.

Yeah there is money to be made.  No one will go long on a China economic meltdown, so the market will short.


Peter K's picture

And now for something completely different, Jon Corzine

Just thought I would share

Hmm...'s picture

it was the drops in commodities as the USD strengthened that were optically of the highest magnitude.

Recently, there was a ZH post about how gold was clearly the safe haven because of some short term market action.  At the time, I stated that the USD (in the form of US Treasuries) is clearly the safe haven (or at least the acting world safe haven), despite how ridiculous that sounds if one examines the assets/liabilities of the USG.

That trend continues.  Risk off days see money flowing like crazy into UST and towards the USD in the Forex markets... while the commodities markets go down with stocks.

Commodities have followed too closely along with equities since September IMO.  makes me wonder if the same yahoos that blew up the stock market are major players in the commodities markets (obvsiously they are more involved in paper markets than physical, but the paper markets do affect physical pricing).

Whalley World's picture

Gold = $ not to be confused with a commodity.  As long as gold (real $) is on sale, it's a buying opportunity.  Unless you see the future full of optimism in which case, i want what you are taking.

topcallingtroll's picture

The fact that every single one of us vilified treasury bonds and missed participating in the best returning asset class over the last thirty years has got me to thinking.

What will be the best returning asset class over the next thirty years? What is most vilified by us now?

European stocks?
USA stocks?
Emerging market bonds?

Caviar Emptor's picture

Almost 19 percent of the country’s 50 million or so 401(k) participants have loans outstanding on their accounts, up from 15 percent five years ago

slewie the pi-rat's picture

a green and mellow basket
i gave my money to The Man
and he ran off and stole it
he stole it
he stole it
the weasel bastard stole it

the moral of the story is that if it hurts to sit down, don't ask

today's report sez that as we neared the close (paste),  "every member of the basket was contributing to risk aversion"
still, as long as the FED will swap dollars for euros AT A CERTAIN PRICE, things may not come totally unglued until timmah arrives in the EU and, as surely as the seasons solstice, fuks things up so badly that TEOTWAWKI arrives before jolly old st. nick

zombies + kicking cans = doom, BiCheZ!

chump666's picture

 Risk off.  The mind boggles how on dumb smart money is, metals were selling all session.  Asia is selling now.  Major sell overall, then the beloved print job.  By then too late, it will be the end

chump666's picture

rate cut Aust markets.  Boom, commodity pain ahead.

Mike2756's picture

Race to the bottom, we're winning!

Grand Supercycle's picture

SP500 monthly chart remains bearish and USDX weekly remains bullish, so it’s only a matter of time until the market makes its move.