Credit (and vol) continue to lead the way as smart deriskers as ES (the e-mini S&P 500 futures contract) ends down only 0.5% - which sadly is the biggest drop since 12/28. The late day surge in ES, which was not supported by IG or HY credit (and very clearly not HYG - the HY bond ETF - which closed at its lows and saw its biggest single-day loss since Thanksgiving), saw heavier volumes and large average trade size which suggest professionals willing to cover longs or add shorts above in order to get filled. Materials stocks underperformed but the major financials had a tough day as their CDS deteriorated to one-week wides. VIX (and its many derivative ETFs) had a very bumpy ride today. VXX (the vol ETF) rose over 14% (most in 3 months) at one point before it pulled back (coming back to settle perfectly at its VWAP so not too worrisome). After the European close, FX markets largely went sideways with the USD inching higher (EUR weaker) as JPY strength reflected on FX carry pair weakness and held stocks down. Treasuries extended their gains from yesterday's peak of the week yields as 7s to 30s rallied around 6bps leaving the 30Y best performer on the week at around unchanged. Commodities generally tracked lower on USD strength with Oil the exception as WTI pushed back up to $99 into the close (ending the week +1.1% and Copper -1.1%). Gold and Silver ended the week down almost in line with USD's gains at around 0.25-0.5%. Broadly speaking risk has been off since around the European close yesterday and ES and CONTEXT have reconverged on a medium-term basis this afternoon (to around NFP-spike levels) as traders await the potential for event risk emerging from Europe.
[10]
As we warned yesterday, the significance of the divergence with credit in Europe and US was becoming palpable and the Storm that we noted was coming has begun we suspect. Stocks managed to cling to the cliff-edge that is the post NFP spike levels while credit has fallen significantly below pre-NFP levels. No follow through at all in credit on that late day surge in stocks and HYG seeing its single worst day since just before Thanksgiving (chart below).
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Let's see how many investors who reached for yield stick with them when they realize that a third to a half of their annual yield just got taken away in 2 days - as we've said before, there is a reason they have a high yield.
[12]
VXX (the Vol ETF) was very volatile today as VIX (above) saw its largest jump in three months - as many know this is very typical VIX behavior, slow leak down and abrupt flare-up. We suspect the implied skewness and kurtosis discussions we had earlier in the week are being laid again after normalizing.
[13]
Treasuries roared back to life late yesterday and through today as supply ebbed and risk appetites dropped. 10Y seems the most volatile - perhaps on its mortgage hedging exposure - but 30Y outperformed on the week - ending just a little higher in yield.
[14]
The USD pulled back towards unchanged today after reaching its lows for the week just around the European close yesterday. Day after day we have seen the most volatility during the European day session with reversals into and around the closes and opens. After hours today EUR is pushing modestly higher on news that the Greek cabinet has approved loan plan but it is staying under 1.32 for now. JPY was the biggest loser on the week though stable as the USD strengthened against the other majors - this carry-pair impact dragged broad risk assets lower - though chatter is that a rotation to the EUR as a funding currency is occurring though we suspect the binary nature of the currency makes it a little too noisy for the risk-sensitive players.
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To get a sense of how broad risk assets have been behaving this week we use a medium-term (as opposed to the short-term model that is used for trading and arb) CONTEXT [16]- which as you can see is well synced with last week's pre- and post-NFP behavior. The whole week has seen a very narrow range for US equities that again and again has seen CONTEXT (broad risk asset proxy) and stocks converge around that post NFP spike level (green oval). Monday saw a broader derisking among risk assets but US equities maintained into Tuesday where Oil and Treasuries led risk-on and the faded to convergence. The sell-off and curve steepening in Treasuries along with Oil strength and FX carry all helped to push CONTEXT aggressively higher but the divergence lower in the latter part of the week reflects back to credit's underperformance dragging on stocks. Today saw Treasuries rally, curves flatten, and carry lose ground as non-equity risk assets fell back to earth and reconverged with stocks for pretty much the entire day session today in the US.
On the late-day news from Greece, Treasuries are modestly higher in yield, EUR (and carry) is modestly higher and CONTEXT is leading for now (as ES is closed) suggesting a 3-5pt bounce only. It will be along weekend.
Charts: Bloomberg and Capital Context [17]