The squeeze continued in equities as indices of the most-shorted names handily outperformed the broad market but it was the general aggression with which equity's moved relative to both credit and broad risk assets that will raise eyebrows as rumor after refutation after no-news after denial seemed to have full optionality with all the upside (hope) and no downside (reality).
Equities and credit stayed relatively close together until the early afternoon but as we headed into the last hour or two equities were making higher highs as credit lower highs (red and green arrows). Combined with underlying relative weakness in financial stocks, net-selling in bonds, and negligible compression in their CDS, it seemed equities may just be tottering but an upper cut from Gasbag and a left cross by YHOO/MSFT and ES took off to the races - well beyond credit, broad-risk-assets, and sense.
After hours, ES pulled back closer to fair (red oval) with credit indices and context but remains considerably 'better-looking' than most other assets would infer. The last 30 mins or so (into and through the close) did see risk-assets in general limping lower even as stock futures pushed higher (we have seen stocks notably rich to context since early morning today (Europe time). While the discrepancies between IG, HY, and ES are not large (above) and between ES and CONTEXT (below) it does provide some slowing pressure for the new normal reality elevation that is US equities.
Most specifically in credit today indices underperformed intrinsics (on the day - though remain well ahead from Friday's close) with skews implying the Long IG, Short HY decompression trade remains crowded (IG super rich and HY super cheap here to intrinsics). This could add some more ammo to HY outperformance but given the size of shifts in the short-end of the HY space (very much wider since Friday) relative to the 5Y maturity, we get the feeling that retail is getting drawn into HYG while pros are selling down cash HY. It did seem like retail was buying while professionals were backing up the truck less. Nowhere is that more evident than in HYG relative to HY this afternoon...
We explored the technicals and less-than-bullish movements in financials bonds vs stocks earlier this afternoon - that did not change although Jimbo Gorman's leak did manage a decent ramp in the financial stocks into the close - closing +1.2% from Friday now (though Citi, Goldman, American Express, and BofA are all still lower from Friday's close in stocks). Basis trades in CDS-bond land and unwinds of arbs seemed the order of the day with very little real compression in spreads which remain hugely troublesome for a trustworthy organization in the financial services business.
The EUR just kept on going - even in the face of larger haircuts and further stress tests which appear only designed to show minimal GRE exposure which we all know is not the point. Besides with France and Germany having a tete-a-kopf about whether any bank has capital 'issues' and who will pay for it, we were rather surprised by the endless bid to the EUR (vs USD) as CHF weakened and CAD strengthened against the USD. After the close of cash in the US, the EUR retreated modestly as DXY bounced off the week's lows. AUD strength has been quite impressive too which always helps the carry trade get going more.
TSYs made it back to almost unchanged on the week (with the short-end underperforming) but managed a small rally around the close to end with yield down on the week but higher on the day. Modest flattening also came in on a day when the Twist bought TIPS.
Commodities and precious metals all bounced nicely this afternoon after being down earlier near the week's lows. Copper managed a unch-to-down-4%-to-unch roundtrip and Silver was even more impressive in its dip and rip. Gold, Silver, and Oil are all now higher on the week as Copper lags (Silver the outperformer) and Oil tests $80 once again.
The bottom-line is we are all waiting with bated breath for the 'fix' for Dexia tomorrow that will solve the ills of the world but for now we suspect the long-only equity managers that appear sheep-like one after the other on TV must be entering the peak Sisyphean phase just about now as volume lag and bearish sentiment and outflows remain and under the covers, professionals do not seem to be the ones holding this up.
Charts: Bloomberg and Capital Context