Market Snapshot: Did Credit Just Capitulate?

Tyler Durden's picture

Another day, another 12 swings of greater than 0.75% in S&P futures as volume slid to the lowest in a week and second lowest in two weeks. Credit and equity markets stayed largely in sync (as they have for the last few days - with slight beta-adjusted underperformance of credit) until around lunchtime and then a funny thing happened to investment grade credit.

At around 12:30ET, the most liquid credit index, IG17, gapped tighter as ES and HY reversed briefly off the highs and then IG did not stop - compressing 3-4bps more into the close - notably outperforming HY and ES (its far higher beta cousins).


At the same time, the less liquid but hugely levered (and exposed to correlation traders, tail-, and jump-risks), IG9, cracked very notably tighter (from our runs around 15bps) to 147bps. IG9 had held up as markets rallied but this move's magnitude and velocity suggest more than just some hedge adjustments and while the rest of the risk assets we cover were all levitating, this 'capitulation' stands out among them. Certainly that move in IG9 - with its accompanying on-the-run hedging - is likely what helped IG17 dislocate from equities today and we wonder if it was the ammo the market needed to exhaust as we head into tomorrow's NFP extravaganza.


After Europe close, FX markets went into drift mode as the dollar just leaked to one week lows with EUR managing to hold well above 1.34 and all the majors (apart from swissy and cable) made new highs (vs USD) for the week). CAD is the best performer since Friday and once again we note JPY's stability - something perhaps Mr. Trichet should look t.

TSYs never looked back once Europe had closed and are now notably higher in yield on the week with 2s10s30s at 75bps now 8bps higher on the week and an impressive 25bps off Tuesday's lows. We suspect the 2s10s30s carry trade that we discussed so much last year (and prior to Twist) is back in play again, helping fuel some of this re-risking of the last few days. Arguably at current levels, 2s10s30s suggests ES should be 1175-80 so perhaps the underperformance of ES suggests that early fuel is running low.

Commodities kept on trucking today with oil taking out $82.50 (up 9% from Tuesday's lows) and Silver clearing $32 (up almost 12% from Tuesday's lows). Gold is behaving relatively well given the chaos surrounding it - stabilizing around $1650 and holding around 1.75% higher on the week, which compared to only a 0.45% loss in the USD seems reasonable for anyone.


After leading risk down, ES seemed to be leading it higher also in CONTEXT over the medium-term and in the short-term, thanks to the moves in 2s10s30s and oil (as well as AUDJPY), equities remain cheap here - believe it or not. However, the correlations have been incredible and this feels like a light switch wil flick and reverse it. The most clean signal we have of relative performance is longer-term against HY and equities remain expensive. Moreover, a model we often look at with regard to SPY in the context of TSYs and IG credit (IEF and LQD) is very much at the top of its highly mean-reverting channel - suggesting if nothing else that equity needs to pause for bonds to catch up. It seems that tomorrow's NFP will be the center of attraction though little action this week seems predicated on any fundamental analysis of what is an increasingly concerning endgame overseas - the focus on a localized domestic (US) point-in-time print when all around us is asunder, seems fickle at best and ignorant at worst.

Charts: Bloomberg

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Spitzer's picture

Sideways action is just what the doctor ordered for gold. Better then a spike up.

Real Money Wins's picture

Buy gold and silver now and hide it!!!


U.S. Geological Survey, Mineral Commodity Summaries, January 2011

Government Silver Stockpile: None.


Fort Knox Gold Stores: Empty!!


Jack Napier's picture

Ever dance with the devil in the pale moonlight?

LeonardoFibonacci's picture

are you talking about Lloyd Blankfein?

Jack Napier's picture

It was intended to be ambiguous, but you're right that he is doing "God's work" afterall, and we all know whatever god he may be referring to is not a benevolent one.

diesheepledie's picture

As part of the Illuminati Blankfein is by definition on of the "benevolent ones".

hambone's picture

Attended Portland, Or version of "Occupy Wall St." on my lunch break today for it's kickoff...bout 5k, maybe up to 10k people (way beyond expectations...maybe the fact it wasn't raining helped?) but repeated again and again was the anti Wall St. "casino" slogans, that the real economy has completely disconnected from the "financial" world, that HFT was a joke and backrupting the many for the few.  Fewer wackos than I expected and generally a good crowd...later this afternoon was the march and that should be interesting so I'll watch that on the 6 'oclock news (that's when the strange "lurkers" around the fringes of the crowd who have little to no idea what it's all about likely have their chance to vent their displeasure and hijack the day).

mynhair's picture

Too bad you never attended a TEA party rally. 

hambone's picture

Yeah, I guess the fact I and other somewhat "normal" middle class folks are attending shows how social mood is turning dark, desperate. 

Our little slice of highly indebted suburbia is on the line!

bigbucksr's picture

am probably just too stupid to understand, but not sure what the implication of the article is as far as the markets?  bullish bearish?  credit capitulated?  what does that imply? 

o2sd's picture

IG9 is CDS index on corporate paper. The higher the spread, the more likely that some corporate entity will default on some coupon of their bonds. Therefore, if IG9 trades higher (in spread), it is bearish for the underlying corporations in the index (for a list, look here:, because presumably a corporation that cannot service it's debt is a sell, not a buy.

On the other hand, the S&P and other equity indexes that include many of the corporations in the aforementioned IG9 are trading higher, which is contrary to the credit market (IG9) which is trading at a higher spread. In other words, credit and equity should be inversely correlated, and that inverse correlation is used by traders for hedging equity indexes.

Which is why the article asks 'Did credit just capitulate?', because the gap up in IG9 indicates a move to risk OFF, and credit markets are usually a more reliable indicator than equity markets.

I think ....

Tinsu's picture

Thanks, o2sd.  Your post was insightful.

fromthebleachers's picture

Seems you're newer o2sd, but great shades of the old ZH where parsing of stuff like this made the comments great reading for those of us wanting to learn as to know the enemy.


o2sd's picture

No problem, happy to help out. Equities are still on a tear today, so it is either the corporate credit market is about to reverse, or we are seeing yet another Friday pump n dump, just in case there are any greater fools still left in equity markets.

90D commercial paper seems to be holding steady for non-financials, but there is no secondary market for it, so it tends to be a lot more stable than CDS. I assume that IG9 is primarily used for hedging equity indices, rather than being a useful indicator of short term corporate debt stress.

30/60/90D non-asset-backed commercial paper in financials on the other hand seems to be extremely volatile, although I'm not sure how big that market is as financials tend to use other instruments for short term funding (repos, swaps, bankbills).


mynhair's picture

What about HGY popping while LQD was selling towards the close?  Kept the trigger from being pulled...

Never mind, found it.  These old eyes kept skipping the relevant sentence.

Mike2756's picture

LQD:HYG, normal 3 day pullback in an uptrend?

Minoan's picture

You fuckers,i clicked to the US President's talk,just a few previous posts.Then ,i deleted the flash cookies as i always do.There was a cookie named i am not even from US.As for the markets,meltdown is near.

mynhair's picture

Don't worry, only the TSA stole your information with that cookie.

Rynak's picture

Uh, if you watch a GOV video linked from a GOV webserver, then umm, you'll download something from the GOV.... capito, retard? Or do you also expect, that if you i.e. watch a youtube video, your computer will not connect to.... youtube?

....and yep, lots of meltdowns seeming near recently, but some happen earlier than others - your brain appears to be among the those "earlier" things.

Belarus's picture

Wow, sounds like ZH went bullish equities. 

mynhair's picture

No, just shorts getting wiped out and compressing yields, with a dose of inflation thrown in.  I think. 

disabledvet's picture

Seems to sum it up pretty good.

Belarus's picture

Why would I get junked? Right there in the article is says something to the effect, "believe it or not, equities look undervalued to credit." I know ZH"ls stance...."on a long enough timline..." and am with them so don't get alll puffy and out of sorts....

Jeesssh. I love ZH.

mynhair's picture

If you care, you shouldn't be here.  And I'm the belated up.

St. Deluise's picture

you got junked for falling out of line buddy

everyone knows it's dollar to zero, euro to zero, stocks to zero, gold to infinity

Vengeance's picture

Anyone notice this? --- Forex swaps with ECB total $500 million - NY Fed - RTRS
Today 14:06
    NEW YORK, Oct 6 (Reuters) - The Federal Reserve provided $500 million of liquidity to the European Central Bank in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday.
    The ECB was the sole institution to tap the swap lines in the week ended Oct. 5, swapping the full amount.
    The terms for the ECB swap were seven days at 1.09 percent, the New York Fed added.
    The Federal Reserve has established swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan in an effort to respond to the reemergence of strains in short-term funding markets in Europe.

redpill's picture

They've done this sort of shit before.  $500 million isn't anything to the ECB or the Fed.  It's like they do a trial run in case things get hairy and they need a lot more ($500 billion would be more like it).

Vengeance's picture

True enough, but nonetheless second time (since they reopened the swap lines) in what? Two weeks? But it's not like we don't know Europe is already screwed...

disabledvet's picture

I ask is Bernank a friend or foe if you are Europe? We bailed out Dexia the first time...but not this time. Europe came after the USA with a vengeance when our policy makers had to make their crisis choices...there's no silence when they call us for help (swap lines)...but are we helping them? Or is Big Ben sending a message by "twisting"? We think of it as a dance...but it can also mean "arm twisting"...
and that's no dance.
Is he saying "I can keep my long end under control. Can you?"
Cue to gold...and "how much is on the line." Tons? Sounds like a big deal.

chump666's picture

same old, watching Asia again for clues.  markets are now overbought.

Market Efficiency Romantic's picture

To me it looks like risk-off without hurting the correlation matrix too much, So equities won't be sold off in the process. Does't this along with equity volume differences in up and down moves suggest a major shift from equity to IG credit. IG credit appears to be the save haven to best cope with the turmoil to come. 

Europe will have its moment of truth, sooner or later, but rather sooner, the fragile US economy will react crashing as it does by no means have the strength to even withstand a slight quake. The IG companies cash reserves, though, provide a pretty reliable backstop for save haven. 

This major shift tells me that investors do not believe in a mid-term recovery of productivity and thus equity markets. If that's the case, cash reserves will still serve credit.

The only thing, I am really waiting to see is whether there will be another tricking of NFP numbers as there has been in the majority of recent US econ stats and if that trick manages to convince the increasing doubts with the stats. Once those doubts crash, tell the entire system goodbye. Then, the least problem will be Benny's expectation management flunk.

Once, monetary policy, true econ perception, fiscal execution and an adminuistation in power are all exhausted, 666 will be random number, no one will associate a bottom with.

zerohandle's picture

These white background charts suck.

chump666's picture

...and the EUR is rangy, nice.  Struggling to get the 50day ma. 

mcguire's picture

the 'short squeeze' should run up against the 'who wants to hold the bag over the weekend' issue..   

msmith's picture

Another Market Snapshot with a longer term analysis of the SPX and Gold.  -- Both are looking bullish for the next several weeks.

koriol1902's picture

anyway to find charts for cds indices like or online?

havent been able to find it

Market Efficiency Romantic's picture

Register for free with Markit and you get access to pricing and charts. They include charts for both and .ig

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