We have been warning that the stocks of the major US financials are on weak ground for a few weeks as credit (and implied vol) markets for the TBTFs had been underperforming notably. Today saw the financials ETF, XLF, have the largest down day in three months (dropping over two standard deviations), breaking its uptrend and heading for its 50DMA. As volumes in stocks and stock futures surged to year-highs, we note that the major financials were much worse hit than the broad ETF, roughly separated into 3 groups: Good (JPM, WFC), Bad (GS, C, BAC, GE), and Ugly (MS).
While the market is 'only' down around 2%, it is worth noting that Financials and Energy stocks are back at five-week lows, while Industrials and Materials are back at two-month lows as the growthium hope fades.
[9]
The stocks of the major financial names are down notably in the last few weeks (and most specifically post LTRO2) with many breaking trend and moving-average support today as they catch up to their CDS weakness. Morgan Stanley is definitely the most worrisome once again with CDS at 350bps and stock down over 15% from early Feb highs.
[10]
US financial credit has been flashing warning signals for a month but this time stocks are tracking lower with CDS (we can only hope BofA covered their 'tactical' long credit trade before this latest full retracement to year's wides). Obviously stocks have further to fall to catch up to reality as risk premia from the real world gets priced into credit first...
[11]
The financials ETF fell around 2.5% on the day (or over 2 standard deviations) as we wonder whether the uncertainty of global growth mixed with the re-emergence of European event risk is pushing us back into the Q3 2011 vol regime...
[12]
While equities fell consistently all day, broad risk assets also dropped as CONTEXT [13] led the downswing modestly with a late day stabilization in Treasuries and AUDJPY enough to hold ES (the e-mini S&P futures contract) at 1340. The high correlation between risk assets suggests this is much more broad derisking than some simple profit-taking.
[14]
Credit markets remain under pressure - especially high yield - with HY17 pointing to an S&P around 1300 given current risk premia. As we noted for the last week, the up-in-quality rotation continues as IG remains bid relative to risk (but be careful if you use LQD to trade this view as it is much more exposed to financials than you would want for a safety play).
[15]
In FX, JPY strength was the only standout as carry was removed and AUD underperformed versus the USD. EUR weakness helped push the USD up 0.5% this week as it kept leaking higher into the close.
Treasuries rallied handsomely off overnight high yields (7-9bps) to end the day down 2-3bps in yield on the week as the curve flattened and 2s10s30s fell dragging risk lower.
[16]
Commodities were headline makers once again. Silver dominated down over 5% on the week now but was more like playing high beta catch up to last week's underperformance of Gold in the upswing. WTI is the week's best performer so far (down only 1.65% under $105 again) as Gold stabilized around $1675 for much of the US day session.
[17]
The vol term structure snapped flatter today, catching short-dated premium sellers fingers as it tends to, ripping to its flattest in 3 weeks as VIX jumped almost 3 vols to around 21% (back above its 50DMA for the first time since Thanksgiving), with its biggest rise in three months (a 3 standard deviation jump in vol).
Charts: Bloomberg and Capital Context [13]