Equities suffered their largest single-day drop in 4 months as for once Apple was unable to single-handedly hold up the index letting it drop closer to its credit-oriented risk. A monster day for NYSE and ES (S&P 500 e-mini futures) volume saw Financials and Discretionary sectors underperforming and the Energy sector joining Utilities in the red for the year. The S&P closed at its lows as it broke its 50DMA for the first time since DEC11 as AAPL dropped 1.25% for the day (and -2.5% from the highs) but most notably equities and Treasuries are back in sync from early March as 10Y closed under 2% for the first time in a month. Gold and Silver surged around the European close, on little news, as we suspect safe-haven buying and an unwind of the gold-hedged bank-stress-test rally - with another relatively unusual divergence between Gold and stocks on the day. VIX broke above 21% closing just below it back near one-month peaks as the term structure bear-flattened (but notbaly pushing ahead of its credit-equity implied fair value). JPY strengthened all day (and AUD weakened) as carry trades were unwound in FX markets leaving the USD marginally higher on the day (and EUR marginally lower despite the turmoil in European markets). Oil fell back below $101.50 but it was Copper that has suffered the most - down almost 4% since Last Thursday. Credit markets were weak with HY marginally underperforming IG (beta adjusted) but still implying further weakness in equities as HYG closed just shy of its 200DMA.
Treasury yields tumbled 5-7bps on the day with the long-end outperforming but equities stayed in sync as they pulled back to early March levels...
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but it appears as though the gold-equities hedge is being unwound as they have converged rapidly YTD in the last day or two. This retraces all of the post Bank stress-test outperformance and almost undoing any post LTRO2 outperformance juice left in stocks.
YTD performance of main risk assets...
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While Apple relishes still +55% YTD, broad sectors of the S&P 500 are rolling over rapidly. Energy joined Utilities today in the red for the year but financials have tailed the most in the last few days...
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And the broad derisking of the S&P - which closed under its 50DMA for the first time in 4 months is perhaps starting to drag Apple lower also as it sufferes it largest drop since mid-December...
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but Apple's impact remains evident when compared to credit markets where the selling is picking up speed and volume also...
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But VIX is pushing on ahead regardless (with the largest 2-day spike in over 5 months), touching its 100DMA today at the top, and closing slightly above its credit- and equity-model implied value would suggest...
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And while JPY repatriation (carry unwinds) was evident all day long, it seems between our notes on EUR-USD basis swap deterioration occurring again and the repatriation of EUR that the USD was relatively stable - only managiong small gains on the day - despite all the dysphoria in Europe...
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Nowhere is Europe's stress more evident (except perhaps in our LTRO Stigma trade) than in the Senior and Subordinated credit spreads of European banks. It seems a Senior-Sub decompression trade is in order given the spread and ratio of the two levels of the capital structure but on reflection - just what will be the recovery rate on these should an event occur - given the massive encumbrance of LTRO? It would seem Sub financials look rich still and while more expensive for carry - certainly face minimal recoveries.
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All-in-all, pretty much what credit markets have been arguing [18] for for a week or two now as the sad reality of a flow-less liquidity pump and slowing global economy come home to roost. The cracks in the veneer of AAPL are perhaps most worrying for all those hedgies who have levered themselves into it as we wait until Europe's open to see if the pressure on Italian and Spanish banks resumes.
Finally, for the Alcoa watchers, the company did report a better than expected $0.10 EPS, compared to an expected loss. Yet what does $0.10 translate to? Why $94 million in actual Net Income. Something else is far more troubling: namely the company free cash flow (EBITDA-Interest Expense-CapEx), which is sliding on an LTM basis, as well as its net leverage (total debt-cash), which soared to the highest since December 2010 in Q1 2012 at $7866 million, or roughly 5.0x the company's FCF. Alcoa better restart the cash generation soon or else.
AA Free Cash Flow:
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AA Net Leverage:
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Charts: Bloomberg
Bonus Chart (because its one of those days)...S&P 500 priced in Gold...maybe time to unwind some exuberance
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