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Credit Underperforms As ES Misses VWAP Target Into Close
The algo-driven levitation of the last hour or so today seemed all about making it back to the magical VWAP line so more selling could occur but even though we were rising, average trade size rose notably into the cash close which is very suggestive of pros selling into the lift (as deltas were definitely weak). This little burst was enough to drag equity into outperformance today relative to credit markets which had a very weak day.
Chart: Bloomberg
It certainly didn't have the normal Friday liftathon into the close feel and we note that IG and HY credit indices closed pretty much at their wides of the day - HY +54bps at 737bps and IG +7bps to 132bps. These are among the largest single-day close-to-close moves in these indices we have seen.
Single-names outperformed the indices (though were still notably wider with massively weak breadth) as it was clear that broad risk overlays were preferred (liquidity) and that stress was even more evident with bid-ask spreads widening throughout the day. For some context of where stand in credit spread land - the charts above and below show HY has taken out JUN10's wides while IG remains just below those same-period wides (which makes sense from a risk aversion/cycle perspective). HY spreads are now back to NOV10 levels.
Cash bond markets saw net-buying from the buy-side which quite frankly surprised us a little though given the focus of net-buying in 1-3Y and >12Y and net-selling in 3-12Y - we suspect some were playing a more levered version of the QE3-off trade (the butterfly compression). TSY 2s10s30s fell significantly further to as low as 40bps and we note TSYs (ended the week 5-7bps lower in yield from last Friday.
A little more apples-to-apples comparison of credit spreads (the above charts reflect the back-adjusted on-the-run CDS indices and hence contain a string of slightly differing composition portfolios), the chart below shows the current series 16 portfolios intrinsic values over the past 21 months or so. The picture is similar in terms of HY underperforming IG relative to last summer's decompression but it is very clear that while these levels are wide, they are hardly unprecedented and furthermore, so many transitory onlookers forget how quickly a liquidity event becomes a drama in HY credit markets - especially when new issue concessions (if there is ever a HY bond issued again) will reprice secondaries and start the ramp wider going again.
Yesterday, we discussed the nuances of the index options vol market and the fact that implied correlation was sending us a message - well we heard it loud and clear today as the market cracked and implied correlation rose to record highs for Jan2012 expiration. Realized correlations remain very high (but typically it is IG correlations that drop faster as low beta names are picked up first in any sustainable recovery from a fall). HY names remain very systemically driven - which is something we have discussed for a while as broad hedges are applied to cover portfolios that are too big to unwind into the illiquid circus for now - as the basis widens (which it has done even more this week), the risk managers start to come knocking and liquidations occur (though everything could just come up roses of course). We do note that correlations will be biased to turning back up as the latter days of the rolling 20-day window drop off.
Metals and oil ended the day lower though Gold was the best performer with a drop of around 0.7% as opposed to copper -3.5% and oil -2.1% though given the strength in the USD (DXY +1.27% perhaps not entirely surprising). EUR was among the weakest and JPY strongest currencies relative to the USD today - hardly reassuring as the G-7 meets this weekend.
Charts: Bloomberg
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Going down to 1982 fib support lines at about 800
Are you referring to the Fibonacci line of 800 and the year 1982?
The P&F 10x3 chart on SPX has a vertical count coming out of a inverted W congestion top of 830. Very close to the fib support you see.
The indices have seen some drastic volatility this year. Especially this summer. It has been a time where people who panic lose and those who keep their cool gain. Whatevery you decide to do in these markets just don't panic. If you're going to make a trade and you don't have a solid plan but you think you're going to get an amazing deal because you've caught the market at the right place -- don't. It is much like a scam artist will give you an amazing deal but it is only valid in the next day and you have to act on it now. No matter how great the deal is, double check your numbers aka do your due diligence. Hurried decisions will be the end of your account. I have seen many futures trading enthusiasts take on the ES and do well only to see half their profits vanish in a single trade. All brokerages have seen this on many occasions. Think about it. It is a zero sum market and in order for a few people to realize huge profits, a whole lot of people have to lose some money. The markets are a warzone of zero forgiveness. I've said it before and I'll say it again. Do your due diligence and stick to your plan. Once you notice that you're panicking, stop, take a deep breath, drink a cup of tea, regain your focus and continue. May the best man win.
I'd love to see a dip in Gold here, but I'm not sure this is 2008. Interesting weekend ahead.
There's no way I'd keep a position over the weekend with the G7 short bus kids in town -- no telling what manner of neural discharge comes out of that conclave. Plus it's back to school for the majority of Wall Street next week -- Labor Day Week is over The joyfullness is over. The elists should be back from St. Tropez demanding a bean count.
The Swiss do not make too many mistakes and I have wondered if the knew that the crunch time was nigh . Did they decide to save their economy in order to buy time until all these daggers hit the ground. It could be a very different forex market in the near future. Small landlocked countries in the heart of Europe have survival instincts that some can only dream about!
I think they simply are placed to know what is going on. Their banks are global players. ..."Basel is located in Switzerland"... Their banks are being pressured by the US et al to give up their tax shelters. ...The Greeks were being Greeks...
Also, if you research the Swiss Franc mortgage issue in Eastern Europe, you will find the various countries had "fixed" the Swiss rate back in the summer and were about to pay big time subsidizing their citizen's franc denominated mortgages.
If you were the head of UBS or Credit Suisse, you had to see this coming.
The Swiss aren't out of the woods by any stretch. The Swiss are now in a position to monetize German debt if there is a proper understanding between the Swiss and the Germans. Both parties want to counter the Anglo-American banking axis.
It looks to be a battle between the City of London and the Swiss...
The currency pair charts are very interesting; the Euro seems to be winning the race to the bottom; at the moment. GBP has done quite a good job of devaluing itself, also. I think in several ways the Swiss "schock treatment", ie. "Ve haf Veys to make you eat Choclate"; may be working out all right for them.
Funny how Trichet single-handedly crashed the global risk markets when he started tightening around the same time as China, sending the PIIGS countries into the default zone.
Then he goes ape-shit on TV, people freak out, and the Euro goes into a Death Dive.
Never before has one guy caused so much chaos in the financial markets.
If only Bernanke was left in charge, the Dow would be at 15,000.
"If only Bernanke was left in charge, the Dow would be at 15,000."
- and each one of those 15,000 dollars would also only buy 1/15,0000 of an ounce of Gold.
"If only Bernanke was left in charge, the Dow would be at 15,000". What a remarkable statement. I suppose you actually believe this?
Trichet went into defensive mode today which is one sure way of revealing that ones mind is not comfortable with ones actions . Barrosa did something similar a few months ago when he tried to shield Portugals dire state from the world.
this is totally a doomsday trade. before open you had copper under pressure big sells there. then EZ endgame last stretch on european open. we will see indexes adjust lower, or lower ranges. on todays close, yes there was hft bid/offers but that was it! market turned lower because the liquidity just wasn't there. what ever the brainacs come up next, won't matter. market has priced volatlity ad infitum.
gold will share same vols on USD repatration/risk averse trades. the eur is toast
Cheap toast is good ! "Let the people eat Toast !"
TLT while up just under 1% failed to run to new highs while spy stair steped down. Twist was frontrun and now the TLT SPY pair trade is maybe moving to a long spy short TLT on Bens news for the trigger selling the news. The pair is at 4x support until it breaks down bets will favor long spy. 2% risk on a breakdown to reverse the trade