The post-European-close rally-monkey was in full force today, with somewhat average (though NYSE volume is 30% lower than last January's average!) volumes in stocks, as ES (the e-mini S&P 500 futures contract) made it almost back to unchanged in a post-cash-close squeeze (on notably lower-than-average trade size). However, close-to-close, the cost of protecting equity and credit (in options volatility, implied correlation, and CDS) all rose (underperformed) significantly. It seems everyone believes everything bad (event-wise) is priced in but perhaps they are missing the reality of mundane macro data and earnings.
[8]
As we warned last night on the Maiden Lane chatter, high yield credit (and ABX/CMBX today) was hit hard early on (and so was HYG when it opened) which allowed it to catch up to equity's weakness and suggesting that yesterday's exuberance was overdone (on the back of the gamma-gorging early on). The late-day surge (after the cash close) seemed like stop-hunting (since average trade size was much lower than normal) helped by the EUR margin cuts at CME.
[9]
Given the huge reversal in short-covering (now back to balanced and moving modestly short again) and ahead of a long weekend with potential for further PSI disappointment, we suspect the rise in implied correlation and lack of follow-on from HY credit or HYG means this was not representative of risk appetite (even as ES and medium-term CONTEXT held together closely).
[10]
After hitting 16 month lows into the European close, EURUSD spent the rest of the day leaking higher as European ministers played down the downgrades. We believe that while the downgrades are important, it is the Greek PSI talk fails that are far more important. The strength in AUD was a major driver of late day equity market moves (as AUD gained almost 1% against the USD and was best among the majors). EURUSD lost 0.3% on the week and DXY (the USD proxy) gained only 0.23% but had a significant up-day today closing above the early-week highs. Cable (GBP and SEK were the worst performers on the week and fascinatingly JPY was almost exactly unch on the week.
[11]
As the USD strengthened the last day or so, the more economically-sensitive commodities have slid lower. Copper did managed to hold on near the week's highs (the only metal up today and up 5.88% on the week). Silver and Gold lost ground from the European close yesterday but held 3.25% and 1.3% gains on the week (bucking the USD strength). Oil ended up losing the plot, down 2.4% on the week but managing to climb back over $99 into the close today.
[12]
From a broad-risk-driver perspective, the week was relatively calm in two halves. ES and CONTEXT [13] stayed together on the early way up, then as stocks fell broad risk assets were not as concerned and maintained suport for the resumption of the ES raly into Thursday's early highs but as macro data and then rumors/chatter out of Europe arrived, risk (CONTEXT) fell notably and ES slowly at first then quickly reverted this morning back to its 'fair-value'. From around the European close ES and CONTEXT were very closely in sync and ended right on top of one another. Critically with US shut on Monday, we will need to see EUR weakness (perhaps on PSI failure) to drag us down more from here in a convincing manner.
Charts: Bloomberg