Quite a day in the markets but for those who turn on the six-o-clock news tonight - all is well in the world - Dow +78! Overnight weakness in Japan spilled over into Europe and so began the inkling of JPY-based levered trade unwinds. European high-beta risk was shellacked and as US opened JPY's strength accelerated and credit markets opened significantly gap wider (worse). Equity futures began to tumble and this weakness escalated through the open climaxing as Europe closed. JPY crashed and stocks collapsed soon after the EU close in what seemed very liquidation-driven moves but as soon as Europe was closed - and despite no follow-through from the JPY - equities were ramped magically back to overnight highs (on low volumes). It seems VIX and HYG were the ramping weapons of choice. Dow 15,000 appeared to be all that mattered as we head into the NFP tomorrow - but perhaps investors forgot that a) Japan opens in a 4 hours, b) Europe opens in 11 houors, and c) The 'Taper' talk is the fed jawboning us off the exuberance band-wagon - it is not about NFP.
JPY-carry was all that mattered - until it didn't.. When Europe closed... US was bid
[6]
Credit markets gapped down at the open and then were ripped tighter to start the run this afternoon...
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FX markets were the most unbelievable - with JPY's biggest gain in 3 years...
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Everything changed as Europe closed... and then - overall the last hour or so in stocks was just nuts VIX collapse-driven craziness as no other risk asset moved...
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and the Nikkei didn't play along with US equities either...
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Today's swings would have taken the shine off JPY as a carry funding
vehicle for a while - so now what - TSY 2s10s30s? WTI curve?Doesn't seem that way...
[11]
So evidently it was VIX (see above) that was used to lever equities higher - but the heavily shorted HYG was the bigger correlated weapon - HYG had its best day of the year today!!!!! After touching the low price point of the rally early on... Squeeeeze... on heavy volume...
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It seems our earlier advice was heralded [13] - since HYG was 9 sigma cheap to the SPY... though we suggest the arb not the outright
Charts: Bloomberg