Financials Underperform Amid Lowest Volume Of The Year
It seems bifurcated investors have well and truly deserted the markets as NYSE volumes (MVOLNYE on Bloomberg) closed at their lowest of the year and ES 25% below average volume. A slow and steady drop all day in risk assets stalled a little in the afternoon as newsflow dried up and broad risk markets added nothing to the selling pressure. Financials underperformed, making a late day recovery but losing much of that bounce into the close - though we note the machines managed to magically close ES perfectly at VWAP. Broadly credit and equity stayed in sync today but we noted HYG getting hammered in the afternoon - only to revert back to HY by the close. EURUSD held above 1.36 into the close with the USD obviously stronger and dragging down commodities with all but Copper losing ground from Friday's close.
Credit (HY and IG) markets for once stayed nicely in sync with equity markets - but the huge dip in HYG in the afternoon suggests (as we have pointed to again and again) that hedgers found its liquidity more useful than HY17 (the CDS index) as some technical issues with recent defaults might be creating angst in the latter. Fascinatingly - as we approached the close - HYG rallied smartly back up to its HY17 'brother' - we have pointed to this repeatedly as an opportunity for cross-desk arb.
This HY-HYG arbitrage trade is generally only available to institutions (given the ISDAs involved) but there are ways to play the cross-asset move in the retail ETF space and today's move in the SPY Arbitrage model (a model that attempts to mimic SPY performance via a weighted basket of Volatility (VXX), interest rates (TLT), and High Yield credit (HYG)) shows the divergence and convergence as it happened. Buying a weighted basket of the VXX, TLT, HYG against selling SPY (or vice versa), given the tightness of bid-offer spreads, can be profitably traded based on trigger levels and mean-reversion.
While not always as perfect as this (and not tradable by all), it is often a useful gauge for how disconnected SPY is from the broad top-down capital structure asset classes of rates/vol/credit on an intraday basis. The drop in HYG (which drove the Model down in the above chart) suggested that the equity market should have fallen but it remained somewhat resistant - and the disconnect from HY17 also helped to show that the HYG move was very technical (i.e. hedge flows) and not simply a broad risk-off move. Of course, with volume so weak, today's market seemed too thin to make any real judgments but still we closed near 'fair value' across these instruments.
Aggregate NYSE volume (MVOLNYE on Bloomberg) at its lowest of the year - incredible!
For some perspective on this volume - it appears we are running a few weeks ahead of the typical seasonal pattern of liquidity/volume drying up. This chart shows the seasonal averages (highs and lows also) of the MVOLNYE index from Bloomberg.
FX markets stabilized a little after Europe's close - though it is notable that JPY started to lose ground against the USD (after retracing over 75% of its intervention gap).
The afternoon's generally lackluster performance seemed most evident in CONTEXT as it did not partake of the dip lower in stocks. ES retraced back up to the risk-asset basket into the close. We would look for 2s10s30s to drop or TSY yield compression to be the bigger driver of a next leg down.
Gold managed to outperform away from Copper's exuberance (though Copper fell over 2% from early morning highs) - clinging to $1780 as Oil and Silver continued their high beta inverse performance relative to DXY's 0.74% rally.