Echo. In a slightly less aggressive replay of last Sunday/Monday's reaction to news from Europe, equity futures (and FX markets) opened gap-up and faded significantly to end modestly green after touching the 50DMA briefly. A 20pt drop from its open last night in S&P 500 e-mini futures on the less-than-Armageddon-but-more-of-the-same-disaster scenario played out, which then retraced around 50% of its drop during the day session. Equities diverged strongly from a notably decompressing IG and HY credit market (and significant weakness in HYG - the high-yield bond ETF). Treasuries and FX markets also remain disconnected (implying weaker levels in US stocks) as broadly speaking risk-assets did not feel the same love as stocks today. It would appear that, given the heavy volatility action, drop in Short-term vol (VIX), and recent divergence from stocks, that there was heavy vol selling today which supported a higher equity market in a virtuous manner until later in the afternoon when VIX and SPX had recoupled and stocks then limped lower to VWAP. Treasuries ended the day relatively unchanged from Friday's close after opening 6bps higher in yield, rallying 10bps from there as equities and FX plunged, and recovering higher in yield as the US day session progressed. EURUSD held under 1.26, diverging lower from equity strength from just before the US open leaving the USD higher by 0.45% from Friday's close - even as AUD strengthened notably. Commodities generally ignored USD strength with Copper, Gold, and Silver practically unch from Friday's close while WTI dropped over 1% to around $83 by the close. Financials underperformed as a sector (as Tech and Discretionary gained) but the majors were the worst hit having given up all their gains from Friday's MS lost 3.4%, Citi -2.6% and BofA & GS -2% with JPM close behind.
VIX had 'decoupled' more bearishly (higher) from equity markets last week (just like credit) but it seemed today gave the opportunity to bring the two markets back together as VIX compressed dramatically back into line with stocks by the middle of the afternoon - once that 'technical had lifted, stocks leaked back off their day-session highs to close near VWAP (only to see an after-hours pop back up to the highs
[7]
VIX saw its biggest drop in over 2 months (and 2nd biggest drop in eight months), ending below its 50DMA for the first time in over 5 weeks. We do not that the lat two times we have seen a drop of this magnitude, the following day saw a 14% and 22% jump in the short-term vol measure)...
[8]
but credit was telling a very different tale today as HY and IG were notably worse on the day (dark and light red) and despite a late-day save in HYG (green), even the high-beta driver lost decent ground early on though the afterhours ramp to highs in ES (blue) was 'interesting'...
[9]
ES was noisy but basically tested above Last Monday's opening highs at its open, faded to test Friday's lows, after falling off a cliff as it passed Friday's close. Once the day session had started (orange oval) ES remained between Friday highs and VWAP finishing up at a low volume node (an area that had not been tested much during the day - red arrow)...
[10]
led by energy and financial weakness as the major TBTFs gave up all their Friday gains...
[11]
Across broad risk assets, correlation broke down notably this afternoon (lower right chart) - after being relatively high in the European session. Between HYG and VXX softness, SPY was dragged lower in the late afternoon (upper left chart) but recoupled by the close as HYG regained its footing. CONTEXT (a proxy for broad risk assets) diverged weakly from equity's strength from the middle of the European session (upper right chart) but VIX was rather notably decoupling lower (lower left chart) from its longer-term fair-value with credit and equity markets as it saw one of its largest single-day drops in months...
[12]
ES volume was below average and average trade size remains on a downward trend. Stocks remain unsupported by FX, credit, and Treasury markets.
[13]
Any VIX technical is lifted now after today's convergence and ES tested and failed at its 50DMA today. For now we are less systemically trading but with the financials lagging rather notably today, we wonder just how high the conviction of a Bernanke-save later in the week really is.
Charts: Bloomberg and Capital Context