Derisking

Intraday Major Yen Divergence; Parallel Derisking In Process

While the logic of how a US economy equates to a weaker dollar escapes those who think before pushing buttons and chasing trends, a glance at intraday currency performance indicate a substantial divergence in then Yen relative to the global "short-dollar" complex. Even as the euro, cable and OZ are powering higher, the yen has been caught in a weak zone, and has been declining all day long despite a stronger than expected US economy (yes, it does make sense...but don't think about it too hard). The oddity in the FX market is compounded when juxtaposed with Japan CDS levels: as of several minutes ago, Japan CDS was trading around 63 (white line on the chart below): a level last seen in April. This begs the question: what does someone know about Japan, and will this weakness translate into weaknesses for other non-US currencies?

Coordinated Derisking

It appears the market now only acts sensibly on big volume selloff days. The chart below is what one would expect, and what one would never see over the past 6 months.

Substantial, Over Half A Trillion Net, CDS Derisking Since March Lows

Analyzing CDS open interest data since the March 6 lows demonstrates a troubling trend: there has been over half a trillion in net derisking across various industries, with financials leading the pack with over $130 billion. The global tightening in the CDS universes across all sectors is one direct consequence of this substantial shift to derisking.

Daily Credit Market Summary: May 1 - Derisking Is Back

Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as we see high beta shorts selling index protection as hedges) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.