Credit Unconvinced As Stocks Close Near Highs Of Day
Credit markets were far less sanguine into the close than equity markets as ES managed to get back to day session highs (and beyond). IG and HY credit markets closed much nearer their lows of the day and while broad-based risk assets rallied off the morning lows, the late day surge in stocks was entirely idiosyncratic!. HYG outperformed HY while HY secondary bonds were much more balanced (net buying to selling) today than in recent days. It certainly appeared credit market participants were much less comfortable holding into the Greek vote and uncertainty of the weekend than equity players. The USD was noisy all day but rallied into the close (as the EUR drifted back under 1.38) and Gold trod water as oil managed a modest rally while silver and copper lost more ground on the week. TSYs rallied only modestly today with the belly outperforming as we saw major duration reduction in corporate bond trading on the day as the long-end was net sold. VIX rose modestly into the close, disconnecting from stocks - like every other asset class.
Having tracked remarkably well all day long - as is relatively typical on lower volume days - the worlds of credit and equity disengaged into the close. Was it the Cyprus downgrade top 1 notch above junk? Missing MF money? Chatter out of Greece on Venizelos taking over? Who knows but the point is that the professional-only credit market did not agree with the flurry of excitement that took stocks to their highs of the day-session.
Interestingly HYG outperformed HY into the close. We have been prevaricating on the behavior of HYG relative to HY corporate bond buying, fund flows, and HY spread performance. In a nutshell we suspect that professionals are using the HYG ETF creation unit to 'force' the managers to buy in the illiquid HY secondary market enabling them to offload their illiquid large inventories of HY bonds - that would otherwise by very difficult.
The chart below shows that the HY bond advance-decline level is at extreme levels and while fund flows have indeed been positive, the rise in shares outstanding for HYG in the last six months has been unprecedented (as we sold off no less) further reinforcing the idea that professionals are helping to pass risk off to retail via the ETF. This is of course a theory - but we do not hear many screaming buyers of HY debt and furthermore, primary markets appear shut still (despite impressive equity rallies and IG issuance) - risk appetite remains subdued.
Away from pure credit and equity markets, we saw equity hopefulness was very evident by its richness relative to CONTEXT (the broad basket of risk-based assets can be tracked here) as we entered the NFP print zone this morning. As the disappointing reality hit, it was somewhat amazing how ES converged down to where broad risk markets were suggesting value was. For the rest of the day, we tracked rather well as rumor/news moved markets together - ES overshooting modestly to the downside at the lows. It is, however, confirming of the credit-equity dislocation above that ES pulled away from CONTEXT into the close - again perhaps a little more enthusiastic than the rest of the market as to the weekend's activities.
The FX market was relatively calm in the majors for most of the week - compared to Sunday/Monday's craziness and it seems the quasi-peg that the MoF has instigated is holding for now as JPY's movements flat-lined.
And while the USD managed to gain around 2.5% on the week, oil and gold also improved on the week - while copper and silver slid commensurately.
And while Treasuries saw yields tumble dramatically (by around 25-30bps across the curve from 5Y out), we ended well off the week's lowest yield levels as 30Y managed a drop of over 40bps this week at its best.
The seeming reality that BTPs are not well contained, that the EFSF strategy seems woefully unfunded and severely lacking in details, and the increasing sense of chaos arising from Europe (and its recession-prone self) should be wearing on investors. As macro data this week in the US was also hardly positive (and mostly disappointing), the fact that credit markets continue to trade much more negatively than stocks should at worst temper enthusiasm and at best see flows to IG credit (ex FINs) as vol remains elevated.