Despite Bazooka Rumor, Equities End Unch As Commodities Surge

Tyler Durden's picture

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

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TruthInSunshine's picture

The Bernank Broken Markets Chronicles:

Skynet Cribs Zen In The Art Of Motorcycle Maintenance

SheepDog-One's picture

The problem with carrot and stick rumor based economic/world financial model is when the horse finally catches the carrot, theres nothing left to chase after!

So here we are....whats next to drive futures up tomorrow? I guess theyll have to announce this plan wont work and DOA, so more Hopium can be thrown around. Only bad news can drive markets higher.

sabra1's picture

insiders using the rumour based rallies to sell into! they take out real cash, while HFT's pump in air cash! money laundering at its finest! 

SheepDog-One's picture

Oh yea obviously pump while we dump! 

Hard1's picture

Again, the "double firewall" is nothing but a double barreled squirt gun

Ancona's picture

Since all they do is kick the can, I just went in 100% long on cans. I think the symbol is CNS, but I'll have to look again to be sure.

Manthong's picture

Pfizer makes Viagra and Disney creates Fairy Tales, so I’m long PFE and DIS as an extend and pretend play.

Caviar Emptor's picture

I posted this elsewhere: 

Key US Senators, all from the Banking Committee will meet tomorrow with IMF's Christine Lagarde to discuss Euro crisis and what can be done. Translated: expect Uncle Sugar (and you) to cover another backdoor bailout (probably already underway). In their discussion today, they mentioned that they will have to "thread the needle" between drastic budget cuts and backstops

Translated: save the banks and banksters, fund them so they can save the sovereign debt. And cut the real economy to shreds. But the disconnect is now complete: in western capitalism you no longer need a real economy, consumers or growth for the banks to prosper and the paper to bloat. It is a total self-funding mechanism as the Fed prints and prints and keeps banks and governments fat and happy. Oh, the only thing missing is you'll need paramilitary police departments with APCs and tanks to keep the sheeple quiet (uhhh already happening)

DB Cooper's picture

So sick of these games and this con job of a financial system.

Cadavre's picture

The bubble pop tell is in full bloom (again). Recent bursts typically preceded by a convergence of the VIX/VXO and 21 HV. When they spend a week or more dancing within a penny of each other, and then repeat - a pop follows.

Don't know what to make of the VIX/HV correspondence .. but .. it seems to these simple eyes that equities are trading more like a derivative of their options (rather than the other way round we were taught in school). A few short duration VIX/HV minuets since summer's "baby" pop and it looks like they be dusting off their best patent leather taps for another "meaningful downside" tango real soon.

Any stats anywhere regarding VIX/HV relation?

vote_libertarian_party's picture

If she thinks Congress is going to pony up some money she is crazy.


Maybe she wants to stress to them a category 5 hurricane is headed our way.

Snakeeyes's picture

love reading Zero Hedge before stand up and speak to an audience and give this presentation:

Keep it coming! I need reading material while the other speakers give their presentations.

kito's picture

what kinda rocket has been under palladiums ass the past few weeks!!

InconvenientCounterParty's picture

It should be correlated well with energy, as refinement is very energy intensive. 220 tons is a years supply WW. I believe a significant % of supply comes from Russia, so geopolitical tension is supply tension.

long PAL & SWC.


Duffminster's picture

I"m sure this could be old news by now but it certainly provides a stark context for talks of the ESM and so on:


From the Telegraph and the UK:

Bank of France debts jump tenfold on capital flight






Duffminster Time

TruthInSunshine's picture

When the Myanmar-North Korea-Haiti-Sudan stability fund falls through, then we have to start worrying about this whole foundation the fractional reserve banking geniuses have set up for us.

But not until then!

chump666's picture

Rangy markets for end yr seasonal strength? Thats bearish.  It is all Asia again especially China, more USD buying and outflows (Yuan, HKD) leaving Asia.  There wont be a commodity rally, sans oil (hedge on the soon-to-be-worthless EUR) and Gold.  Silver will sell and Copper is going nowhere fast.

This market looks frightening.

Stax Edwards's picture

I took some profits off the table when we failed to hold above 1264, but I remain bullish.  It seems we cannot break through resistance here without real progress in the EZ.  Same range.  So far the Santa Rally was basically a recoup of the thanksgiving massacre.  Still B'nTFD in quality.

chump666's picture


I hear ya...there is a bullish sentiment, but it is barely holding.  I always look at Asia prior to EZ/US open.  The bear signal is coming out of that region.  IMO it's holding down the rally.  I think we will sell into end yr. then meltup up early 2012.  From there the massacre will start. 

Stax Edwards's picture

On China: Hard Landing yes, but look closer at how the relationship with the US works.  A slowdown in China does not neccesarily mean slowdown in US IMO.  The inverse is quite another story.  Lower commodity prices seems a reasonable expectation.  I am a believer on the decoupling thesis.

I think the markets are a better read on China than anything the ministry of propaganda.  Obviously the markets aren't buying it.

Curtis LeMay's picture

Oh dear oh dear oh dear...

From Ambrose

9:00PM GMT 06 Dec 2011

Bank of France debts jump tenfold on capital flight

The Bank of France faces surging debts to Germany's Bundesbank and fellow central banks in the EMU system as foreign investors pull large sums out of French accounts.

French lenders lost €100bn (£86bn) in short-term deposits in September alone, mostly due to precautionary moves by US money market funds and Asian investors afraid of France's exposure to Italy. "There were huge net capital outflows".


JustObserving's picture

That was in September - an eternity ago.  Current conditions may be ten times worse.  Sarko better get the war with Iran started before people ask too many questions.

chump666's picture

+1 and this "Summit" it's all about letting Greece go...and recap German banks and backstoping France.

The EU leaders are a f*cking insane bunch.  Oil is heading towards 110. should 100% take Italy out, Spain, Ireland all of them on stagflation.  Not much else to say anymore except Europe will be in a world of pain thanks to their can kicking mania.

Attention on China/Asia/Japan.  That's the ice on the cake endgame.  Tight.

chump666's picture

...and watch for German repatriation flows in.  The zombie EU is nearly dead.  Once France goes and Germany shuts down ala China crash.


junkyardjack's picture

So rumors now have a life of about 1 hour in the markets.  Europe better higher some science fiction writers to come up with ideas, they are going to need to start thinking outside the box if they want a rally to last more than a day

Yen Cross's picture

 That was a great piece Tyler. Might I add, the dxy and eur/xau are diverging. I'm still long the $.  Look @ the real money buying the (aud) @ the 1.018 handle. The Point being!

 Commodities and commodity based currencies, are running from that European ( BLACK HOLE) , ~ debt!

i be julia's picture

Holy shit.

Soon we'll all be pay paying 8 dollars for a gallon of gas.

I'll have to start stocking up on Pork and Beans.