Treasury yields retraced more than 50% of their rise post-FOMC yesterday leaving them only marginally higher on the week as, despite another late afternoon light volume surge to VWAP, stocks closed with their second biggest daily loss of the year. Three days in a row now, ES (the S&P 500 e-mini futures contract) has closed at its VWAP - suggesting institutional blocks continue to look for opportune/efficient selling levels (as opposed to buying the dips which we are so used to). After Spain's auction debacle and the ISM Services miss, it seems that with no Fed standing guard that good is good but bad is not better anymore as the S&P 500 cash lost over 1% (down 2% from Monday's peak to today's trough). Financials underperformed and the majors (which we noted on Monday sagging after Europe's close) have been really hurt with Citi, BofA, and MS down 6 to 7% since then. Equity markets in the US and Europe played catch up once again to credit's more realistic assessment of the world as HYG (the high-yield bond ETF) is back at one-month lows, down 2.7% from its end-Feb highs (or five months worth of yield, oops). Investment grade credit (which remains rich to its fair-value) was not helped as Treasuries were the place of refuge for the day as 30Y yields dropped their most in 2012. Commodities suffered significant damage as Silver tumbled to meet Gold's loss for the week, both down 3% Copper and Oil also dropped notably and are now back in sync with the USD for the week -1% or so. Most major FX remained USD positive except for JPY which retraced its snap lower from yesterday as carry trades were generally exited (with EUR and AUD weakness mirroring JPY strength post-FOMC) leaving DXY near 3-week highs. Who-/What-ever was doing the buying in the afternoon clearly levered the position (using AAPL or options) as VIX dumped once again out of nowhere intraday - closing near its lows of the day. However, VIX did close up near one-month highs as it catches up to Europe's VIX flare. Given the drop in implied correlation (and in-line VIX-S&P move) we suspect the covered-call strategy of the year was coming undone a little at the seams as single-name vol underperformed.
European financials have converged in equity and credit and continue to sink. In the US, it is credit markets that remain far less sanguine - though today's weakness - especially in the majors suggests they are catching up to reality fast...
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and US majors have been losing significant ground since Monday's European close...
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but once again ES (the e-mini S&P future) retraced back to VWAP with the bulk of the volume surge in the selling period...
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Commodities will likely dominate much of the news (despite the fact that stocks in context fell considerably more relative to the year's performance in the last two days).. Notice how gold and silver have recoupled on the week as have Oil and Copper with USD strength...
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Treasuries were the big winners of the day with 10Y and 30Y having their best days of the year in terms of yield compression - having retraced more than half around Fib 61.8% actually) of yesterday's spike...
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VIX managed to compress as stocks rallied but the drop in implied correlation, as VIX tracked stocks more or less - suggests single-name vol was bought back (protection sought) with more vigor than a macro overlay. This fits with the recent 'stock-picker's market' that has apparently evolved and the already steep term structure of index vol. Perhaps the easy money from covered-call writing is over...
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The USD is up around 1% on the week with a notable divergence between JPY strength (carry cover) and AUD (trade deficit and carry unwind) and EUR (chaos emerging and Spain) weakness.
Overall a rather messy day with no real signsof dip-buyers (even with the retracement - as it looked more like algos feeding institutions). Cross-asset class correlation picked up considerably throughout the day (lower right) as broadly speaking, risk assets (CONTEXT - upper right) were sold more than equities for now (diverging with the late rally). VIX managed to increase to its credit-equity implied fair-value (lower left) before compressing into the close (as we mentioned above) while equity ETFs tracjed each other broadly efficiently (upper left) as VXX outpaced HYG's losses.
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Charts: Bloomberg and Capital Context [16]