Despite CAT explaining to the world that things are nothing like as good as they have said in the past and that their ability to forecast is gone given monetary policy hindrance (paraphrasing), the stock oscillated from pre-open gains to a big drop out of the gate, to a squeeze higher gapping as shorts covered to end the day up 2.75%. We explain this because it perfectly summarizes the market today. Overnight JPY weakness supported risk assets, Italy's Napolitano helped, and into the open we were comfortably green; but the moment the bell wrung the sellers appeared and pushed the S&P down (coincidentally) to last Monday's crash lows. Once Europe closed, the bulls got the green light and stocks surged on light volume running stops above overnight highs; stocks leaked back off their highs though ended comfortably green - a mere 20 S&P points off the intraday lows! While all this tom-foolery was occurring, Treasury yields plunged from their overnight highs and flatlined 1-2bps lower (ignoring equity's after noon exuberance). Commodities were similarly unimpressed as gold and silver held overnight strength but flatlined in the US afternoon as stocks popped. FX was in charge of the rally today as AUDJPY ruled pre-European close and EURUSD ruled the afternoon. VIX compression as protection was unwound helped support risk, but high-yield credit slammed lower into the close.
Bonds ignored stocks today...
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What was driving the ship today... S&P followed JPY-carry into the European close, and EUR all afternoon...
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VIX compressed notably as protection was clearly unwound - with the S&P 500 cash index ending at last Wednesday's gap down open...
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The unwind of index protection has the smell once again of managers reducing size as market breadth was very weak (especially in the post EU Close) - as we noted last week, VIX was bid last week as the fastest most liquid overlay that can be slammed on a long book of stocks. Uncertainty remains high - as does realized vol recently - but today saw the selling pressure out of the gate matched by market breadth (real reduction) and then the afternoon saw the indices soar even as relative volume buying was very weak - this suggests that the VIX compression above was unwinding the macro hedge and unwinding underlying positions into that strength - as opposed a full risk-on lift...
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Gold had its best day in 3 weeks ending back above $1425 and its best 5-day run in 18 months...
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But it was FX that dominated cross asset class correlation today and drove stocks but the afternoon saw stocks off in their own world once again...
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So it seems once again - today was a game of two halves with US equities bid after the European close and offered before... makes perfect sense if you forget that Europe re-opens in 8 hours...
Charts: Bloomberg and Capital Context
Bonus Chart: CAT... seemed to enjoy the European close too...
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