For the third day in a row, the USD was bid from the Europe open to its close and drifted lower in the US afternoon. Today's limp lower in the USD this afternoon (with AUD and CAD strength while JPY was flat) provided, along with some leaking higher in Treasury yields, support for a modest risk-on levitation in stocks as the S&P 500 tried and failed to get back to unch after falling below yesterday's lows (well below the pre-ISM levels) early in the day. Credit, equity, and Treasury markets were remarkably in sync today - which is unusual given recent dislocations and correlation across asset classes in general picked up. Gold (and the rest of the commodity complex) traded pretty much in sync with the USD all day, leaving Silver down 2% on the week and WTI back under $106 but still +0.4% on the week - but Gold -0.5% (in sync with USD's 0.5% gain this week) was the best performer of a bad bunch today. VIX generally traded in sync with stocks aside from an odd gap lower right at the close. Treasuries ended the day 2-3bps lower in yield (a few bps off their best levels though) leaving the entire complex modestly lower in yield for week (aside from 2Y which is +0.4bps). Broad risk assets ebbed a little into the close even as stocks bounced off VWAP for one last push but volume leaked away as we rallied (as normal).
The USD has been bid throughout the European sessions this week and then drifted lower after the EU close...
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Stocks and Treasuries (blue and red) were in almost perfect sync today as were commodities (gold below) and the USD (green) - though the latter appear to be lagging the hope in stocks still. Gold held in better than Silver, Copper, and Oil though today...
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HYG remains cheap (stocks remain rich) but after stocks (blue) caught back up with credit's disappointment (red arrow) they all traded very much in sync today...
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The high correlation (lower right quadrant below) is most evident in our cross-asset class models [7]...
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Upper left shows the SPY-Arb model (which tracks the behavior of an ETF basket of credit/rates/vol - HYG/TLT/VXX - relative to Stocks - SPY) was extremely highly correlated today (only small deviations between them - middle left). Upper right shows the CONTEXT model (our cross-asset class proxy for risk sentiment) which was extremely highly correlated (unlike in recent days) but came apart a little into the close as risk assets in general slid lower relative to stocks (right middle orange oval).
VIX rose to almost our credit/equity model's fair-value early on and then slid lower all day (lower left) with an odd gap down and refill at the close.
Today was a better volume day (as Europe was back) but the volume ebbed as we rose in the afternoon. After yesterday's one-month high in average trade size, and today's re-correlating action across asset classes we suspect hope for QE has faded a little and this was a dead-cat-bounce in stocks but with ECB tomorrow and NFP on Friday, anything goes.
Charts: Bloomberg and Capital Context [7]
Bonus Chart: Gold outperformed (though fell - matching USD's gains) as Copper dropped hardest in the day...
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