Credit Outperforms Stocks As Asset Correlations Deteriorate Further

Tyler Durden's picture

Thanks to disappointing macro data early on and better-than-expected European auctions (and ECB not cutting), the EUR went bid early on, accelerate after the Europe close, and stayed that way for most of the day (EURUSD squeeze? or ES-EUR convergence?) ending a one-week highs. Typically this USD weakness would juice stocks (and to some extent it did this afternoon post-Europe) but once again it was more AUDJPY driving late (odd) strength in stocks as Oil prices cratered on Iran sanction delays (dragging energy names lower). Treasuries oscillated in a 4-5bp range before and after the auction ending close to unch (very small steepening). Credit markets gapped tighter around their open (thanks to Europe's early strength) but leaked back as the morning wore on.  

Stocks underperformed credit overall as IG and HY credit rallied into the European close and held gains - while HYG (the high yield bond ETF) significantly underperformed on the day (compressing its NAV premium further despite a modest late day pullback) which should be mildly concerning for bulls (given the size of flows and momentum behind it recently).

ES (the e-mini S&P futures contract) converged with VWAP and CONTEXT around lunch then pulled higher into the close managing to tag the day-session open but broad risk-drivers did not participate so much (and we saw higher average trade size volume come in covering at the close).  Volume ended about average for the year in NYSE stocks and ES (though still well down from December).


HYG (green) underperformed out of the gate (as IG and HY credit outperformed). Stocks (blue) managed to get back to their day-session open highs (but notably off overnight highs).

Heading into tomorrow's JPM call, financials managed a rally on the day overall (XLF +0.4%) and while most managed solid rallies back towards their opening highs on the day, BAC (notably) did not - clinging to its VWAP -1.4% on the day with heavy volume at the opening selling over $7. Yesterday's stabilization in major financial CDS did not hold and they extended their gains today (maybe GS and JPM slightly widened into the close). Energy names obviously underperformed on both NatGas and then the late Oil drop.

The USD (DXY) fell back to Tuesday's lows and held it while EURUSD dropped to one-week lows over 1.8. Cable (GBP) remains the week's worst performer against the USD and we note the significant rally in swissy today (extending yesterday's gains).

Oil is down 2.3% on the week (sub $99) seeing its biggest 2-day drop in a month and while Gold and Silver leaked lower from midday highs, Copper managed to hold onto its gains (now up over 6% on the week).

Al-in-all, more of the same small open to close range in ES, volume low relative to December, divergences between credit and equity, and correlations breaking down. Medium-term ES is a little expensive relative to broad risk assets (CONTEXT) and credit markets but they are converging as credit gaps again.

HYG was the only standout to us today that sent a worrisome signal and we note that implied correlation is still leaking higher (demand for macro/index protection remains relatively higher than underlying single-name activity). Implied Correlation is at its highest since01/04 and VIX sub 21 near its lows (though we note the steepness of the short-end term structure and cheapness of vol relative to credit suggests Vol is due to rise in the short-term)

Charts: Bloomberg

Comment viewing options

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

Is it just me or do those charts rather resemble the rainbow shooting out of Nyan cat's bung?

akak's picture

Oh, I thougth they were encephalograms of RobotLemming's brainwaves while listening to a speech by Bernanke.

redpill's picture

If that were the case it would be a flat line, akak.

akak's picture


Good one redpill!

But actually, it would probably be a flat line under any circumstances, now that I think about it.

gmak's picture

Does the author have any estimates as to when the fundamental divergence will resolve itself?


Check out TURDS site, he contradicts himself. Tells the masses that paper is criminal then trades the COMEX. In with the sharks..keeps the criminal ball rolling..hope he loses his shirt.

redpill's picture

Don't hate the player, hate the game

akak's picture

Could one perhaps argue that it is the continued participation of the many players which allows the game to continue?

redpill's picture

Not when we're talking about a small fry.

xela2200's picture

We know the game is crooked, but it is the only game in town.

akak's picture

Can a person not just refuse to play the game?

Bay of Pigs's picture

So now you're spamming anti Turd messages on every thread at ZH? Nice work troll.

Stax Edwards's picture

Somewhat OT:

Is it just me or is FCX the perfect stock to own at this moment? 

Just looking at the big picture I would like to make the following case for owning FCX for virtually any macro view at this point.

- PM Bulls have a equity play on Gold here

- Recovery bulls have a play on copper which is up strong this week, a strong recovery bodes well for Copper

- Dividend seekers have a nice divy to hold them over in case the bottom falls out of the market

- QE Advocators know if it is unleashed Gold will soar again, so should FCX

- Doomers know if the economy tanks QE will be unleashed, gold will soar...

- China is easing...

Anyone have a case for being short FCX?


Schmuck Raker's picture

In December 2008 it was $10/share. I don't see any reason it couldn't revisit that level.

Is the future 4X brighter today?

ILoveTheWorld's picture

Yes, and since then it's been forming a gigantic perfect head and shoulders...

slaughterer's picture

HYG looked like it was about to jump off a cliff until some last-hour stick save.  I think even the big hedge players are worried about something turning over.  

chump666's picture

very topped market.  late meltup got crushed as longs were pulled via momos.  last 30 mins HFTs were gaming sideways.  Yes, ECB after their obscene money pumps this side of Ben Bernanke, were able to finally drop Spanish/Italian yields.  But as we all know, the ECB needs to buy debt constantly, so they will continue to buy in all markets.  Credit spreads should be blown to hell...but CB's are printing like mad.  The oil price?  Don't worry that will be back over 100 in days.  Yields will begin to blowout again and inflation will hit Europe/US hard next few mths from the mini crack up boom in consumption end yr 2011.