Equity and credit markets traded in a narrow range for much of the day - especially post the European close - only to swing violently up and down in the last hour on the back of FT rumors or a bigger bailout. Volume was notably lower than average though as ES sold off hard into the close, and picked up significantly higher as we crossed VWAP, with the market closing well below that balance point. Broad risk assets were generally a little more positive this afternoon as the commodity sector saw decent outperformance all day (most notably Silver and Gold) but it was TSYs post-Europe sell-off (and EUR strength) that continues to ring the bell of repatriation flows. Today felt a lot like ES (the e-mini S&P 500 futures contract) was the tail of the CONTEXT dog with these 'TSY-EUR' flows having a significant impact. Credit indices in general tracked ES, though lagged its late day rally and sell-off, ending the day modestly outperforming equities (though this was likely a liquidity issue more than anything else). HYG once again outperformed supporting HY bond net buying as IG saw decent new issue volumes on the day. While broad assets are modestly supportive or risk appetite as we close, the divergence between VIX and Implied Correlation (which closed at two-week highs) raises an orange (maybe red) flag once again.
Silver was very excited today, managing a 3.5% intraday swing from low to high (near the highs of the week). Copper managed a solid day and we note that Oil and Copper are converging again on the USD shift this week. Gold is the under-performer on the week so far (down around 1%) but managed a positive day today.
These commodity moves (most specifically Gold and Oil) helped provide some support for CONTEXT which remained biased positive relative to ES most of the day.
The FT rumor caused ES to rally up and converge perfectly with CONTEXT (the broad risk asset basket-based indicator of equity value - dark blue), but equities gave it all back and then some, to close very fractionally lower on the day at the end of the futures session (with the drop continuing post the cash close). ES oscillated in a tight range around VWAP (light blue) for most of the day but as is evident the 1% rally (almost 3 standard deviations away from VWAP) in the last hour, quickly reverted with ES perfectly balanced at VWAP at the cash close and finding some volume pickup in sellers as the futures traded on for 15 more minutes. CONTEXT (dark blue line in chart above) remains a little more bid - helped by TSY levels and curve shape shifts - as we note 30Y TSY closed near its high yield of the day, not retracing as aggressively as stocks.
The curve notably steepened, and 2s10s30s (another CONTEXT driver) rallied strongly - both supporting the fact that broad risk assets are positively biased relative to stocks here at the close. A similar picture is evident in credit markets.
IG and HY initially lagged the ramp up in ES, but given how quiet it was, they were reracked tighter only to stay near their tights and not retrace wider as stocks old off into the close. HYG (the high yield bond ETF) managed another miracle outperformance day, remains expensive to NAV and HY spreads.
One of our more accurate signals popped up this afternoon. The bearish divergence of equity index implied correlation (green) relative to VIX (red - futures) suggests that while vol was compressing at the index level, it was bid relative to the underlying names as implied correlation closed above 80 for the first time in 2 weeks. This means market makers were more than willing to soak up this 'crash risk' as we head into the EU summit.
All-in-all, broad risk markets suggest ES overshot to the downside after the close and will revert modestly higher this evening. The TSY-to-EUR repatriation-flow argument seems to be increasingly driving ES whiplash and we would expect only a decent flattening and compression will draw CONTEXT lower and support a more negative bias to stocks here. The implied correlation divergence is generally a worrying sign for risk appetite suggesting pros starting to hedge macro risk into the EU summit.
Charts: Bloomberg and Capital Context