While there was no news from the Greek-Troika discussions, 'deal' chatter was enough to juice S&P futures to day/night session highs (above 1200) on a significant rise in volume. All day we had 5-10pts swings in ES hinging on every headline from Europe and it was very clear that underlying equities themselves were being dragged in a very macro-manner (no surprise at the intraday correlation) with financials lagging most of the moves and ending down 2.7%.
The rally in stocks in the last hour was mirrored in EUR strength but not as much in credit markets (IG and HY spreads were far less excited). Notably front-end spreads underperformed - curves flattened in HY as single-names and indices did converge as we head into the roll tomorrow. IG still seems quite rich and HY modestly cheap to their respective fair-values - suggesting the market positioning is more biased to macro decompression and a flight-to-safety.
TSYs gave back some gains as ES rallied but were unable to get close to the same 'high' levels of the day ES managed. More critically, 2s10s30s, which had fallen all day, hardly budged as stocks rallied. ES average trade size picked up also as we reached 1200 suggesting (once again) that the professionals were selling into this strength.
So once again we see stocks acting on their own cognitive dissonance while general risk assets were far less impressed with the chatter. As the close approached, ES fell back from its greater-than-two-standard-deviation-above-VWAP level, converging back towards credit and TSY curve expectations.
It appeared a significantly algo-driven day (once again) in equity indices with VWAP playing a very significant role post European close.
Gold outperformed relative to the other PMs/commodities from Friday's close but still lost almost 2%. Copper -3.6% and Oil/Silver around -2.4% as the dollar gained 0.7% on the day. The EUR recovered half of its losses by the close ending at 1.368 (-0.8%) while JPY was the winner, strengthening 0.27% vs the USD on the day as carry trades were modestly unwound.
It seems to us that the Europeans are waiting on Bernanke by delaying this decision. Time is running out for the Greeks on their interest payments. We assume Bernanke knows he is being 'gamed' to some extent here and we also found it fascinating that Geithner chose to comment specifically that "U.S. in Good Position to Handle ‘Shocks’ From Europe" suggesting we should not panic if we see something scary from across the pond. Given the lack of movement in 2s10s30s, which remains our preferred measure of the market's expectation of a 'Twist' style solution from Bernanke, it would appear that the bond market is becoming less confident that it will occur. Perhaps this is a reflection of Bernanke calling the European's bluff with no global stick-save tomorrow? or perhaps it is simply business-as-usual and we will ease our way into oblivion.