Stocks 'Volumelessly' Soar But Credit Tells A Different Tale
The headlines will crow of the resilience of the US equity market, of the outperformance of US financials today and the better-than-expected consumer sentiment print this morning but just below the surface in both European and US credit markets, something is stirring. Investment grade credit outperformed (not exactly as reflection of the need to add risk fast), European financials (senior and sub) were significantly weaker (day and week), high yield credit notably underperformed stocks and investment grade credit, US financial credit spreads have leaked notably wider from yesterday's early US session to the close today - not tracking the stocks higher at all, and just to rub some salt into the wound, sovereign spreads in Europe weren't exactly ebullient as basis swap spreads decompressed (worsened) to over one week wides. ES (the e-mini S&P futures contract) leaked higher and higher on low volume (accounting for the roll) supported by TSY weakness (and curve shifts) and Oil's exuberance as the S&P had two targets in mind it seems: the 200DMA and the YTD unch line. Commodities rallied with Gold clinging to the USD's weakness on the day but Gold underperformed on the week as Copper led the charge (though all ended the week lower). The squeeze and algo-driven (CONTEXT and ES were very closely correlated today) rally today remains worrisome until we see higher beta credit join the party - and that doesn't mean HYG which saw record inflows this week and helps explain its idiosyncrasies.
IG credit outperformed (beta-adjusted) equities which outperformed HY credit on the week but its very evident that the inflows into high yield bond ETFs are dislocating that market (and given the real HY bond and spread market we suspect will be fast money). The bid for non-financial investment grade credit makes good sense in an up-in-quality up-in-capital-structure environment that we think investors should be in, but does not support any risk-on thesis for sure.
The green dotted line is the YTD unchanged line for the cash S&P 500 which just happens to coincide closely with significant support and resistance levels this year, the current price, and the 200DMA. The low volume ramp today seems like a path of least resistance trade as many sat on their hands awaiting post-summit downgrades.
US TSYs had an interesting week with 30Y decompression the standout. The curve out to 7Y saw yields drop overall and a small rise for 10Y as 30Y ended just shy of the week's worst (highest yield) levels. Most of this sell-off occurred after the European close.
European sovereign spreads were mixed and hardly sending all-clear signals on the week.
US financials saw CDS spreads decompress non-stop from yesterday's early day tights. This widening is very notable for MS and BofA, especially in light of today's stock performance. It seems we have a disagreement and it is often proved that credit anticipates and equity confirms.
The same was evident in European financials. The French bank downgrades aside, senior and sub financials lost significant ground (as did XOver - the other higher beta credit exposure in Europe) as seen in the red oval above. Investment grade spreads rallied and it seems equities took their cue from that as we suspect traders used the tightness of XOver earlier in the week to reset hedges a lot tighter and place some new IG-HY decompression ideas.
Equities were relatively well-supported by broad risk assets as CONTEXT chugged along thanks in most part to TSY yields rising and steepening curves. Oil also helped juice the market a little as FX carry and Gold did little. TSY 2s10s30s jumped significantly and the slow leak gently higher in EUR after the European close makes on wonder if there is a drip-drip-drip unwind of overseas assets and equities are the tail of the repatriation dog.
Commodities all underperformed the inverse-USD strength this week with Gold worst, Copper best and Oil and Silver almost synced at the hip. The late day surge in oil helped maintain the bid in stocks (via risk factor correlations) and seems a little idiosyncratic. Gold remains by far the most stable of these risk factors.