Is The Risk-On Rally Real?

Tyler Durden's picture

Whether its non-confirming volumeless rallies in stocks, hard-to-find collateral, sovereign risk, counterparty risk, USD funding stress, GDP growth dislocations, EM credit dispersion, or equity market outperformance, Nomura's EEMEA FX and Fixed Income team has a little for everyone in today's '10 Things We Did Not Know'. Today's obvious risk-on knee-jerk-response rally is perhaps not so broadly supported.

 

1) Did you know that volume is not confirming the recent rally? On a 2-day average basis, Monday's volume was lowest y-t-d despite a 3% jump in the stock markets...(clearly some well-informed managers knew something though as we discussed).

In 2010 volume patterns were similar

But Did you know that in 2010 two days including Black Friday also had the lowest average volume if we exclude trading in the last days of the year? The main difference, though, is big pick-up in volume in December, with a rising trend in the S&P500 and a very bullish market at the time.

The search for balance sheet (collateral) continues...

2) Did you know that both EUR and USD FRA-OIS spreads are above May 2010 levels and continue to rise? As the chart shows the European banking system suffers more as the spread between EUR and USD widens.

Risky Sovereigns in some countries, risky countyerparties in others...

3) Did you know that in Germany and France markets have signalled much higher counterparty risk, while Italy signals higher sovereign risk? In UK and US, counterparty risk is rising, according to markets.

Demand for dollars is at a peak once again, but not everywhere...

4) a) Did you know that not only EUR basis has moved significantly to the right, but the same has happened in NOK, SEK and JPY? USD funding in these countries has become much more expensive.

 

4) b) Did you know that cross-currency basis in AUD, KRW, GBP and CAD has not experienced any significant moves lower and in CAD basis is even increasing?

In EM we look at hard currency demand...

5) Did you know that in EM the basis has moved to the right, but while moves in PLN and ZAR were contained in HUF and TRY they were very significant?

Probably, the only good news for the bulls is the market is short EUR/USD again...

6) Did you know that the market sold EUR/USD once again and that positioning has become stretched again? That was probably why EUR/USD tried to squeeze towards the key 1.35 level recently...

...but even there, what it represents is questionable when you look at the balance sheet appetite

7) Did you know that asset swaps in Europe have widened very sharply recently (asset swap showing 10y yield minus 10y IRS)? Hungary has much tighter asset swaps than Belgium and Poland tighter than France these days...

And you thought the markets would respond sensibly to macro developments? Not in the current environment...

8) a) Did you know that the US has been one of the few countries where consensus growth forecasts were raised during the past month?

 9) But Did you know that US stocks have underperformed European stocks in the past month despite stronger growth vs. expectations?

One needs to find the right markets to trade your monetary policy views...

10) Did you know that in EM most of the markets are trading like credit proxies rather than rate markets? The only market where you can trade monetary policy without looking on EPFR inflows/outflows or tick-trading in currency is ILS? Apart from AUD, NZD and KRW, ILS is the only market in EM where 1y1y has been falling, suggesting to us that credit/currency concerns are not there.

 

All-in-all, today's smash higher in risk perhaps skews some of these relationships even more towards value and as we wrote earlier, the promise of USD funding (at only a marginally lower rate) seems to have persuaded everyone that all is solved - even as the Grand Plan has now totally failed.