Market Snapshot: Financials Finish Weak On An Unchanged Week
Financials were the day's worst performers as already-priced-in downgrades from Europe, and absolutely not-priced-in talk of worrying liquidity upsets in RMBS markets, staggered them -3.5% pulling back to very fractionally above unchanged on the week. S&P futures managed a small loss on the second lowest volume day since 9/20 with some 'inhuman-looking' moves especially towards the close where ES ripped 20pts (with no support from risk) only to give it all back even quicker. FX also traded in very gappy mode today with some rips and dips - especially after Europe closed as the USD ended the day higher but down marginally lower on the week. TSYs weakened into the close with 30Y outperforming (and 7Y underperforming) post NFP this morning. Credit remained stubbornly weak into the close even as equities burst higher which is similar to commodities and oils in the last few hours as they dropped from their earlier highs and stabilized.
After all the excitement, XLF closed the week with a 0.17% gain - over 4% off its highs of the week but the major moves were more evident under the covers with MS ending the week +5.5% (-5.1% today with a very ugly close, CDS leaking wider all day long, and OTM put vols skewing up once again). MS is around 9% off its intraday highs from yesterday but 20% off its lows from early Tuesday). GS, BofA, and American Express all closed down on the week with WFC, GE, and JPM managing small gains. All the TBTFs closed at or very near the lows of the day today as volume picked up (perhaps as the details of the potential European exposures were discussed). We note that the earlier discussion on PrimeX seems to have shuttered that market as we have not seen a run all day and suspect some of the growing concerns at the lop-sided nature of dealer-positioning and immediacy of weak recoveries and jumbo mortgages might leave us with small doors and large crowds once again - perhaps why financials were relatively sold today as dealer scrambled for whatever liquid hedge they could find.
We noted earlier than credit underperformed in Europe and sure enough we saw credit underperform - especially into the close - as the US day progressed. Most ridiculous of all was the last hour or so when a wondering algo seemed to stumble upon an aimless ES. The evidence in the span of around 30 minutes was total dislocation from the normal trading environment - only to crash back to reality right before the cash market close. Volumes were lagging and lagged even more as we levitated - only to increase significantly again as we broke through VWAP and crashed back down to credit's reality.
Credit's performance was mixed this week with GS +32bps, MS -60bps, BAC -17bps, WFC unch, and JPM -2bps - not exactly a resounding 'all clear' and when we look at TRACE data, corporate bond trading shows there was a major derisking in financials by the buy-side as (in order) MS, GS, JPM, CIT, BAC, DE, C, and DB all saw major net-selling as MS and GS saw the largest volume of trades. IG and HY were basically unch today but IG managed to compress 5bps on the week against intrinsics which closed almost unchanged on the week. The IG curve though notably flattened in 3s5s and steepened in 5s7s and 5s10s - perhaps reflecting the butterfly shifts in the TSY curve that has risen so much this week (corporates outperformed in the belly while TSYs underperformed relative to the wings).
FX markets were choppy all day but EUR closed at its lows of the day basically unchanged on the week. CHF was over 2% weaker against the USD and AUD over 1% stronger on the week though GBP was the strongest vs USD today. Gold underperformed on the week, still managing a 0.85% rise (more than doubling the -0.3% drop in the USD) as oil, copper, and silver huddled together around 4-4.5% gains on the week as Silver lost decent ground after Europe closed today.
All-in-all, a violent day to end a very aggressive week that saw equities leading risk higher only to pull back towards the close to a more reasonable 'CONTEXT'. It still seems like we will need an FX or TSY catalyst to pull equities off their pedestal here (and perhaps the downgrade concerns after-hours which modestly impacted the EUR before it closed will be enough) as risk assets in general are supportive of equities. Credit remains the one asset class that, medium-term, is not buying the strength suggesting the S&P remains 40pts rich here to current HY bond expectations.
We suspect angst among the European chatter-heads will not resolve anything and the concerns in PrimeX will be the main talking point for masters-of-the-universe this weekend.
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