A Market Full Of Sound And Fury Signifying Unch

Tyler Durden's picture

Three important things occurred today: 1) US equities converged down to high-yield credit's less sanguine view of the world; 2) US equities converged to US Treasuries hope-less view of the world; and 3) Gold was the leading indicator for where risk assets should be today - as its stability was the only rock upon which to anchor expectations of intervention once again. The equity market fulfilled every technical analyst's wet dream today with a low volume gap-fill - which notably left today's VWAP at almost exactly the closing price from Friday (i.e. gave bigger players a chance to get out without losing their short - which was exemplified by the sell-off into the close on much bigger than average trade size). Never have we heard just whimsical exuberance at the market closing practically unchanged (ES +2pts) but critically risk markets in general did nothing but revert ahead of tomorrow's real action as the UK (and that means the European credit market) comes back from a long-weekend. Broadly speaking - US equities outperformed risk-assets modestly until the late-day give back dragged them back to reality but overall - IG credit underperformed, HYG outperformed (inflows dominant), and HY and S&P 500 e-mini futures (ES) stayed in sync. The morning's excitement about WTI being down so much and the consumer buying more iPads was short-lived as it surged back above $98. Copper outperformed (and Silver underperformed) but Gold which was modestly lower was the picture of stability and the USD, Treasuries, and Stocks all pulled up to meet its reality. Treasuries ended the day unchanged after dropping 4-5bps in yield at their open last night. The USD is fractionally higher from Friday's close though EURUSD limped higher all-day to 1.3050 (though remains rich to its swap-spead-implied fair-value). AUD weakness into the close stumbled the risk-on vibe and we note that a quite dramatic drop from the open in VIX today has the volatility term-structure back to its flattest in five-months.

ES filled its overnight gap, pushed to nearby resistance, and as VWAP hit Friday's close, exits started (blue bars at right) as we pulled back close to unchanged and support...

Notice below that once VWAP (light blue line) had reached up and filled the gap to Friday's lows, volume (red oval) started to pick up and form the top in stocks - leaving ES with a closing VWAP almost exacvtly (green arrow) equal to Friday's close - who says algos dominate trading eh? ES auctioning up like this to fill the gap and not following through does not suggest risk-on...

HYG (high yield bond ETF) and SPY (stocks) have reconverged after a couple of months of hope...

We called it last night with Gold's stability and sure enough it seemed a strange attractor for today's reversion as perhaps Gold's insight into intervention was enough to snap equities back to unchanged (though if the Fed is willing to move on a -1.5% day - we are all in for a treat over the next few years)...

HYG outperformed (after opening on its 50DMA and bouncing) only to fall back towards the close (on a side note, HYG vol looks modestly cheap relative to SPY vol if anyone is looking to play some low cost lomng vol trades here). IG underperformed significantly (while HY clung to ES all day) and chatter was that credit was quiet but some tranche hedging (and cheap macro protection buyers) as opposed to down-in-quality rotation was evident...

It did not take much for stocks to dump to convergence with Treasuries reality but of course they had to pull away higher today once again - will Treasuries prove right once again?

Equities pulled away from broad risk assets (CONTEXT) around the US day session open (green arrow) and correlation (which was extremely high overnight) started to flag. As we closed, equities drifed back to risk-asset reality...

and finally the volatility term structure has flattened to five-month lows...

So while European sovereigns were weak today, and stocks bounced, the credit connection in Europe is yet to awaken and if IG's performance over here is anything to go by, we will see any early bounce in Europe tonight get sold...

Charts: Bloomberg and Capital Context

 

Bonus Chart: EUR-USD swap spreads imply EURUSD at least 80pips lower here...