CDS

Maybe it is a good thing markets are closed in the US today, as the world is certainly not sharing America's festiveness. The ES was down 22 at last check. The FTSE (yes, the entire index) was halted for more than 3 hours earlier, in expectation of the second coming of Jerome Kerviel. The FTSE futures, however, continued trading, and are now at the lows of the day, down 128. And all bets are off in Dubai where CDS for Dubai World, and its linked Dubai sovereign, were wider by about 120 bps. Dubai World hit 612 bps while Dubai is at 545. The spread between the two entities, which Bloomberg describes as "Dubai World is a holding company for the Government of Dubai", is converging by the second, as can be seen on the chart below. With everyone expecting the next domino to come out of Eastern Europe, it is only fitting that it would instead appear in the Persian Gulf.

Trader commentary:

The widening of CDS spreads on Greek Sovereign debt has caught some attention and now Dubai CDS spreads are on the move: Commentary on Dubai from the EM guys...Dubai in focus as they do another $5b local tranche in the $20b Abu Dhabi program, then ask for extension in Nakheel maturities for 5 months. Very strange. Thought whole point of issuing the bonds was to pay for the Nakheel debt. Dubai CDS +130bps from o'night level of 318 ... seems to be hitting the European markets now.

Sequential popping of bubbles to commence shortly.

Even with equities rocking as gold's top blasted off yesterday, the credit picture was mixed. While most financials outperformed, with the exception of AIG, the action in other sectors was decidedly mixed, with industrials widening by a large margin even as underlying stocks ramped higer. Every product is now left to fend for itself.

In the ongoing US bizarro economy, up is down, and economic weakness represents itself by an increase in the stock market, due to expectations of future liquidity injections and fiscal stimuli, further weakening the dollar. Yet as sovereign CDS has recently taken on more relevance once again, we present the relationship between U.S. 5 year CDS and the DXY index, which over the past 18 months have correlated surprisingly close. Observing the recent action in US CDS implies that it may be about time for the downward dollar trajectory to invert. However the question remains whether US CDS is more a reflection of the level of underlying US distress, or is indicative of the euro-denomination of US CDS. With investors seemingly willing to blast Central Bank policies on a daily basis via the gold market, which in turn drives the currency market, the chicken or the egg circularity of whether fundamentals or correlations drive corresponding risk metrics once again rears its ugly head.

With the equity market sell off yesterday, it is not surprising that the weakness as a result of bad economic data spread to all products, notably credit. The CDS heatmap, or in this case redmap, demonstrates how bad the mauling in IG NA was, where for each name tighter there were 40 credits wider. With all assets approaching a correlation of one, we fondly salute to the memory of relative value analysis.

At 2PM Eastern, CIT's CDS auction was priced at a final recovery of 68.125. This was over 2 bps lower than the inside midpoint market announced earlier. Going into the auction, there was $728.98 billion of open interest, indicating that basis traders were a dominant force and exlipsed correlation desks' influence in the auction. The 13 participating dealers submitted $4.5 billion worth of limit order, with an average bid of 65.66, just 3.6% away from the final settlement price, indicating that the option to low-ball into the Dutch auction and get hit on some insane bid has disappeared.

With today's news out of Ukraine, which may or may not be a dud (although with the economy hardly functioning courtesy of massive quarantines and business shut downs) sparking off what may or may not have been a a huge dollar squeeze (we are still waiting to hear back from the ICE), one observation is that sovereign CDS spreads are back front and center. As we discussed recently, Japan CDS has been ploughing ever higher, yet recent data indicates that the deflating island nation is not alone.

Some dramatic moves in CDS action today, with GASBG 5 Yr Senior Protection flying after the CNBC announcer and bestselling author extraordinaire called for the ouster of god's true broker.

Rather quiet day in credit yesterday (and today credit was wider even with equities completeing 9 out of the 10 past days higher): a few names that stoof out on the wider side: AIG, BXP, EQR, KMP, CAH, RAI, AA and a several utility names. Tighteners were HIG, MET, AXP, JCI, UNH, DOW and RRD. The rest were predominantly flat.

As expected, yesterday was a CDS bloodbath straight out of Kandinsky Composition VIII. Today's action, which we will post later, will be a page out of Picasso's blue period. The market, even the formerly rational CDS one, is now a leveraged gyrator, which moves only based on how much daily pounding Bernanke feels like administering to the middle class by round-housing each and every green-tinted portrait of Washington, Hamilton, Jackson, Grant and Franklin (and a few more, less memorable ones) that the bald Chairman encounters.

Yesterday was pretty uneventful in the CDS world: all the black coloring indicates no material change from the prior day, with a few spots of red indicative some modest widening (notably in MET, XL, JCI, MAR, R and LUV) and a few blue names (AXP, BXP, GE, AIG). Today's data will be quite a bit redder as per the earlier Credit Market Update.

With a half-day in credit yesterday, and the usual meltup in equities on no volume (free money, straight from the Fed, come get your free money: just buy a stock, any stock: since you can't get money anywhere else, buy, buy, buy into the stock bubble), yesterday CDS painted a gloomier picture. As the image below demonstrates, wideners outpaced tighteners. Asonly a few increasingly more powerless computers trade equities these days, we, as usually , warn readers to keep track of developments in the credit arena, and we are hopeful that the regulators will consider our proposition to gradually allow retail trading in CDS products (after the minimum notional is reduced substantially).

Remember the equity market yesterday: total, insane, low-volume melt up? One would think CDS would be blue blue blue. Well, here is what happened across NA IG CDX land.(and yes, no surprises).

David Einhorn is angry at CDS. But is that the full story? Hardly. We believe Einhorn's attack on CDS is an implicit attack on the broken core of the fiat monetary system itself.

Mixed CDS action yesterday, with credit predominantly flat even as equities melted (molted?)-up. Discussions with fixed income traders indicate a predominantly bearish posture yet nobody is willing to stand against the Fed and the Druckmaschinen imports. Where is a man with Soros-size balls when you need him? Alas, that "man" just may end up being China, which would either buy the balance of the IMF gold package (and damn soon) or leave the indirect bid hanging.