US Equity Markets Remain Odd Bull Out
The ongoing squeeze in US equities, evident in the significant outperformance of the most-shorted-name indices from Goldman relative to market indices, continues to keep domestic wealth effects ticking along nicely while US credit and European equity and credit markets do not seem to have got the same memo. While this rally, seemingly predicated on the fact that Europe 'get's it' finally (and admittedly some talking head chatter about the number of earnings beats - which we argue is useless given previous discussions of the wholesale downgrading of expectations heading into earnings), the US equity market is the only market to have made new highs this week, is outperforming its credit peers in the US (which is simply ignorant given HY's relative cheapness if this was a risk-on buying spree), and most wonderfully - is hugely outperforming the European financials, European sovereigns, European IG and HY credit, and European equities. Did US equities become the new safe-haven play of the world? Perhaps this week, but we suspect that won't end well - at least from the experience of the last decade or so.
US equities managed to make new highs today (taking out Monday's highs) while US credit remains well of those tights and has dramatically lagged this last burst higher in US equities over the course of this morning.
While the region that should be all ponies and unicorns is notably lagging from Monday's highs - especially Senior financials (recap size not enough?).
On a broader basis, US equities look ahead of themselves relative to a global risk basket. CONTEXT has been sideways all day while ES squeezes higher. We seemed to have switched to risk leading ES regime this week and while ES is outperforming, post-European close, we will see if the EUR strength continues (driven by more repatriation we suspect given PrimeX's consistent drops - although today's move higher is surprising).
So what exactly is it that US equities are overjoyed about? It seems the austerity of Europe will still be there (perhaps worse), the potential for highly dilutive recaps remains potentially troublesome for US exposures (net and gross), cost of funds for new sovereign debt may be improved (EFSF) but without ongoing ECB buying legacy debt will drag MtM exposure down for everyone and the fact that CDS are becoming marginalized as effective tools by the unintended-consequence crowd perhaps means that all that 'net' zero exposure that US banks so proudly tell us all about will come unhinged (just wait for FASB or IASB to amend 157 or 23 for rules on sovereign risk hedges?).
For now, it seems US equities are the odd one out - living in a beating lowered expectations, de-re-de-coupled world of their own.
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