Equities And EURUSD Outperform As Divergences Increase

Tyler Durden's picture

Somehow, once again, we managed to rally EURUSD (to 2 month highs) on the back of Greek deal hopes (even as Merkel stomped her feet, Hollande flexed his muscles, and Dallara/Venizelos had nothing to report) which maintained a modicum of support for equity markets (which also got a little late day push from another record-breaking Consumer-Credit expansion) as cash S&P made it to early July 2011 levels. Unfortunately, with Utilities leading S&P sectors, credit diverging wider in investment grade and high-yield, Copper underperforming (post overnight China reality checks), WTI's exuberance (relative to Brent at least), and implied correlation diverging bearishly from VIX, we can't say this was a wholly supported rally. Broad risk-asset proxy (CONTEXT) did stay in sync with ES (the e-mini S&P 500 futures contract) after the European close as Treasuries held up near the day's high yields and FX carry stabilized. Financials lagged with the majors actually underperforming for a change as we note the late-day surge in ES to new highs saw significant average trade size suggesting more professionals covering longs into strength rather than adding at the top. Volume was above yesterday's dismal performance but remained below the year's average so far. Credit and equity vol are back in line and credit has now been flat and underperforming for the last three days (even as HY issuance has been high).


VIX futures (red) dropped with the S&P as they tend to do but the index's implied correlation (green - based on the relative demand for macro index protection over the underlying demand for protection of the underlying portfolio names) suggested more interest in protecting assets up here than adding risk.

We also note (above) that implied skewness (the distributional expectation based on options prices) has normalized somewhat (short-term concerns are almost at their lows while longer-term options still see some risk) while implied kurtosis (below) remains elevated (both short- and longer-term options show heightened concerns at tail risk - though not explicitly a bad/downside tail).

This expectation of an extreme move that remains embedded is less directly relevant than the drop in implied skewness (or bid for downside protection) - which is a little different to options skew for clarity - and suggests there is little more ammunition to drive a rally (compression in vols) as we have come in so far - but of course central bank liquidity is the all-seeing compressor of risk and inflator of assets.


Commodities did trade notably higher off overnight lows (USD highs). Gold and Silver outperformed the USD's weakness and Oil and Silver had similar magnitude shifts intraday of around 3% from low to high as WTI tried to get back to $99.

Equities (blue) (and HYG (green) which managed to recover from its underperformance early on) handily outperformed the broad IG and HY credit indices (as HY (light red) clearly underperformed). This is the second day in a row of HY underperformance and is worth paying attention to as HY was the 'cheaper' asset all the way up until last week (based on our RV models) and has stalled here. HY has seen major issuance this week which is maybe not totally surprising after such a record-breaking January has brough momentum junkies back into the market. The only two better Januaries than 2012 saw major drops in the following February.


Perhaps this stall in vol compression and credit outperformance is due to what Credit Suisse notes as credit and equity vol markets have converged back in line here from a point where credit was notably cheap. Certainly we have seen a lot of discussion of these arb trades and this will slow risk appetite a little, now that it has compressed, even as momentum remains (though admittedly has been flat for almost 3 days now in credit).

FX markets were dominated early by AUD rallying on RBA news which stymied a modest EUR sell-off into a story-of-the-day decent EUR rally which triggered stops and pushed EURUSD back up over 1.3250 back to nearly 2 month highs and the closest to EUR-USD swap-spread model expectation in almost three months (seen above).

Treasuries gave up early gains to end higher in yield on the day and week. The long-bond interestingly outperformed and is only 2.8bps higher on the week while 7s and 10s are more like 5-6bps higher in yield. A 10bps range in 30Y today from low yield to high yield as EUR rallied and stocks rallied didn't seem to extravagant and the modest rate rally into the close suggested this was not risk-off sentiment rotating into stocks by any chance.

All-in-all, more canaries, more momentum, more weak-USD strong-gold driven stock buying, more rumors of nothing at all in Europe that push stocks inexorably higher. Perhaps the most important of all the divergences we discuss above is the fact that the major financials saw CDS widen modestly and equities selloff a decent amount (of course relative to their YTD move, hardly at all) into the close.

Charts: Bloomberg and Capital Context

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B-rock's picture

We're waiting for Godot.

Alea Iactaest's picture

Then you'll have to wait until after November. Is there any way the Bernanke Guarantee can fail before the election?

HedgeAccordingly's picture

hot chick taking off her robe on TV with AC slater - because giants won - http://hedge.ly/gFWVSm

francis_sawyer's picture

So I guess you opted for the "two" then...

trav7777's picture

she looked kinda bony and awfully done up

RobotTrader's picture

Another record closing high for XRT and AAPL.


Where is the recession?

What happened to the bear market?

Where is Prechter to answer so many questions?

francis_sawyer's picture

You forgot to mention GOLD there spanky...

slaughterer's picture

The correction is never going to come.  Greeks will be holding hands singing "we are the world" while the S&P makes its way to 1400.  

rustymason's picture

I think you may be right. They can keep this party going for a very long time. They control the money supply, the media, the government,  and the military. What do we get? Some old hag of a whore with an army of boy toys and an aging hippie imitating Lee Iacocca. Get ready, Amerika, another bone-us is coming soon.

Archon7's picture

Well, the EU threw down the gauntlet.  Now Bernanke's gonna have to show them he can out-devalue them with a snap of his fingers...

Kritrdr's picture

It's a classic race to the bottom and we get screwed in the meantime, no worries by Netflix!


lasvegaspersona's picture

Kritrdr You've been reading Rickards. Yes that is the secret...after every financial 'fact' you hear, repeat the phrase "because Bernacke can print more money". This will complete the thought and you will sound like a genius. Example: I was worried the dollar might strengthen and gold crash but I'm OK now because Bernacke can print more money.....and everything will be (notionally) fine.

azzhatter's picture

Is everything fixed now? I just heard Bartiromo say to buy

JPM Hater001's picture

Yeah, the collapse was called off due to a lack in interest.  They are saying maybe after the next season of Survivor finishes.

falak pema's picture


Is this compatible with this ? : European Equities Underperforming Credit As Sovereigns Stable


OK. Miracles can happen on equities all in the same day! Have to be a day trader to be glued to such profound truths.

HD's picture

Even Dr.Doom Roubini is bullish. This is probably not going to end well.

Pike Bishop's picture

A Dumb MainStreeter Rabble Rant


Yeah, WTF? I thought we were all supposed to be dead by now?

All my equity long/long-sides are popping new 52 week highs. I have a bevy of restauramt stocks. They are completely kicking-ass on earnings.

Everything is fine. Go out and get yourselves lunch at PNRA and some beer and wings for dinner at BWLD. Everybody else is.

This is like Fall 2009. I was shitting myself every time I went long-side anything. I thought anything bought above S&P950 was bullshit marked for death.  The biggest pussies on the short-side made out best, because they ran early. And the melt-up continued just fine in an orderly monetary policy fashion.

If The VIX stays on trend, it'll be .01 by next Fall.

Unemployment will be a solid grade of "C" after we push a few million more bastards off the dock and out of the workforce.

The EU keeps Greece in the back bedroom.  Like senile Uncle Earl, when company comes over. Portugal, Spain, and Italy are having lipstick applied everyday.

Maturity roll in March is a done deal. There are at least 10 fucked-up ways to paint it over. It may be logically/sanity fucked-up, but all of Western civilization seems happy as dumbshits to continue acting oblivious to ghastly multiple layers of fucked-up.

Whatever risk-disaster the next band-aid creates, they'll just grab another bucket of fucked-up whitewash to paint over it.

People couldn't be more complacent, and nobody even gave a damn when they got credit card bills for the Holiday spending orgy.

The ICI numbers show the end of the mass evacuation by retail investors. They are just achin' to dive back in. They had to use some of what they pulled out last Summer to pay for food and electricity. But they'll jump back in with the rest.

Forget about it. There is no Reality, except for the one they have created for us.

The other great thing about buying into this pile of bullshit, is that when it does go, you can't be in the wrong place.

The pile of bullshit is so huge that canned goods, guns, gold, rice, currency, stocks, or bonds aren't going to provide any protection. The whole fucking thing is gonna go.

Until then, I admit I was wrong. And am just going to join the rest of the lemmings as they sleep their way to Armageddon.

Fuck it. I'm too old and tired to try to push upstream against this insanity.

Embrace The Matrix.


hungarianboy's picture

SHIT, hw is the EURUSD short? Still holding it?

MillionDollarIdiot's picture

As mentioned I was long euro from 1.27 learn how the game is played fish cakes...short Euro from 1.35 when time comes*(soon) :D

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