Equities traded at their lowest volume of the week (-19% from yesterday alone) as S&P futures volumes remain 35% below medium-term averages. The NFP print this morning provided ammunition for some vol early on but as we drifted into the European close, risk assets in general were pushing lower. Unlike the last few days the circa-Europe-close dip-and-rip only occurred in the equity market today as the USD stayed near its highs and TSYs near their low yields of the day (and high yield credit near its wides of the day) as stocks took off back into the green and meandered either side of VWAP for the afternoon. It seems odd that the afternoon's divergence between TSYs and stocks was not accompanied by Gold or USD weakness (QE hopes) and in fact as we got into the last few minutes, stocks started to push back lower on much larger average trade size but was trapped between VWAP and unchanged on the day. Gold outperformed on the week (+3.4%) just inching out Silver and Oil as they appeared to converge on a 3x beta of the USD 'appreciation' of around 1.2% this week. Treasuries rallied 4-6bps and the curve flattened overall as we saw duration reduction in corporate bonds (with highest quality names (Aaa-Aa3) being net sold). DXY stayed above 81 as the EURUSD scrambled back above 1.27 (down an impressive 1.85% on the week). AUD was the only major to gain relative to the USD on the week (and very marginally). Finally, we saw VIX dropping and stabilize and implied correlation diverged and rose this afternoon which combined with the divergence in risk assets suggests some stocks are short-term overdone at best.
[10]
The USD (DXY) remained at its highs (green inverted) and Treasuries (red near their low yields of the day) as stocks (blue) pushed up post Europe and clung to VWAP and practically unchanged.
[11]
Overall ES (the S&P 500 e-mini futures contract) outperformed/diverged from broad risk assets as correlations (above) [11]broke down to very low levels in the afternoon.
[10]
High yield credit (red) and HYG (the high yield bond ETF in green) underperformed with a late day dive in the latter actually pulling overall stock-vol-rate-credit risk into better correspondence (as seen below in the SPY Arb framework [12]) on a strangely quiet day. Once again it looks like HYG was used to try to spark a risk-on rally (the outperformance of 'Model' below) but this failed as major volume and selling pressure hit HYG into the close.
[13]
Gold and Silver drifted lower this afternoon after modest rallies early on as Oil pulled higher to a somewhat coincidental convergence of these three economic/QE sensitive commodities for the week. Copper came and went with the USD revaluation on the week ending just down YTD.
[14]
The dollar strength was impressive this week and should be very worrisome for corporate earnings in our humble opinion if it is maintained (especially with Oil not dropping on USD strength). The shape of moves this week suggests where the EUR selling pressure is coming from - Europe - as we suspect global investors try and creep through those narrow doors as they reduce exposure to the haircut-facing nations across the pond.
[15]
Evidently that real money exiting Europe seems to be coming from both financials and sovereign bonds as we saw Belgium, Austria, and Spain all see very significant decompression this week, let alone France.
[16]
Finally we note that implied correlation (a measure of the relative demand for macro risk protection versus micro name protection) elevated all afternoon as VIX (3rd month futures) drifted lower and stabilized. We have shown this divergence a number of times and it has often presaged short-term weakness in stocks.
[17]
For now, it is enough to note that macro protection is much more bid than talking heads discussions of VIX falling would have you believe and the divergences between stocks and risk assets [18] in general add to the concern on getting too excited at this week's performance - especially in financials (remember the CDS arb technicals and short squeeze potential).
Charts: Bloomberg and Capital Context