From Peter Tchir of TF Market Advisors
We Are All FX Traders Today...
The correlation between SPX and EUR has been high, but it seems to have hit unprecedented levels today. All you need to know is where EUR is and you can pretty much nail where treasuries, SPX, and an assorted number of other assets are.
The connection and how program driven the market has become is highlighted by the 30 year auction. It was a weak auction, which translated to treasuries down, EUR up, and SPX up. I'm not sure a weak 30 year auction is a sign of risk-on, but then again, who knows.
HYG is trading at 87.60, down only 1 point from Tuesday. HY17 is trading at 91.125, up only an 1/8 today and still down 2.5 points from Tuesday. With RESCAP in the index, that explains some of the move, but once again we are getting a separation of the "professional" hedging tool, and the "individual" risk taking tool. Cash seems firm, and somewhere in between the two indices. Not sure it is quite the right time, but long HY17 and short HYG may make sense again.
Pete's points are extremely well taken on RESCAP and DYNEGY in HY17 but nevertheless the chart below shows the huge divergence between equity (correlation-driven) and credit this week. Perhaps even more critically obvious is the intrday action today - in blue (equities) have made a higher (or equal) high today, as IG and HY are making much lower highs intraday. In fact - IG and HY are near the lows/wides of the day as stocks are near their highs - just another un-reality disconnect.