While the overnight session has been relatively quiet, the overarching theme has been a simple one: currency warfare, as more of the world wakes up to what the BOJ is doing and doesn't like it. The latest entrants in global warfare: Taiwan, whose central bank overnight said it would step in the FX market if needed, then Thailand, whose currency was weakened on market adjustment according to Prasarn, and of course South Korea, where the BOK said that global currency war spreads protectionism. Last but not least was China which brought out the big guns after the PBOC deputy governor Yi Gang "warned on currency wars." To wit: "Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows,” Yi, who is also head of China’s foreign-exchange regulator, told reporters. “Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?” “A currency war, a series of tit-for-tat competitive devaluations, would trigger trade protection measures that would damage global trade and therefore growth globally,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong, who previously worked for the World Bank. “That would not be good for any country with a stake in the global economy.” Which brings us to the fundamental question - if everyone eases, has anyone eased? And is there such a thing as a free lunch when central banks simply finance global deficits while eating their soaring stock market cake too? The answer, of course, is no, but we will cross that bridge soon enough.
We warned yesterday that European equity's surge was not supported by credit and that truism is massively obvious in today's market moves. European stocks soared (especially Italy and Spain) to new cycle highs as corporate and financial credit capped in its recent range - actually widening from its opening gap tights. European sovereigns also gapped tighter on the open and then proceeded to bleed wider all day long - most notably in Spain, Italy, and Portugal. Spanish 2Y jumped over 25bps from low to high yield today (and we suspect Spain bond yields have bottomed in teh short-term). EURUSD remains practically unch on the week - having dropped from over 1.30 earlier when Van Hollen let some truth out on the US fiscal cliff deal. Oil recovered from its spike lows yesterday (as did Silver). GGBs were very quiet and stable at around 35 but Weidmann's comments into the close on transfer unions and not rewarding failure did spook some weakness into risk-assets. Europe's VIX, meanwhile, closed at 16.49% - its lowest since June 2007!
Year-to-Date, the S&P 500 has just dropped back below Gold...Gold's performance year-to-date just surpassed that of the S&P 500 once again. If this remains the case into year-end, this will be the third year in a row that Gold has outperformed stocks. Looking forward, which 'asset' would you choose - Stocks with an implied volatility of 17% or Gold at 15.75% to the end of the year? Sharpe Ratio anyone? Perhaps asking your 'asset allocator' what his weighting is based on will be a worthwhile conversation - with the outperforming returns (past is not a predictor of the future - and noone knows) but lower forward risk expectations?
Hands down, the best way to trade stock market volatility day today is simply not to do it, cash out, and purchase hard assets, in particular, precious metals.
It seems that every commission-taking talking-head with a voice-box is espousing the 'truth' that equity portfolio managers will be forced to chase performance into year-end for fear of career-risk (we presume) in order to merely catch-up. In high-yield markets, however, where performance has been outstanding, things are quite different. As Barclays notes, performance among HY mutual funds is tightly clustered this year (especially relative to recent years). This leaves a HY credit market that is tightly call-constrained on capital appreciation (thanks to Bernanke's ZIRP), starting to see inflows fade post-QEternity (and shares outstanding drop in the ETFs), with managers anxious about their relative performance in a tightly correlated and crowded world of illiquidity away from ETFs. As is clear by recent performance, high-yield market participants are less sanguine on the future than their equity counterparts - just as they were in April.
BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated EupSubmitted by Reggie Middleton on 08/06/2012 09:12 -0400
Rosy econ data + low valuations in markets + cure to European debt crisis, Abercromie & Fitch, Aeropostale, etc. a screaming buy?
A highly correlated market - both across asset-classes and across individual stocks within the equity indices - is now well known. It's a stockpicker's market is the refrain. Well, as Goldman points out, a dramatically narrow leadership is running the show in S&P 500 performance this year. 20 companies (22% of market cap.) account for 55% of 2012 YTD return for the S&P 500. Pick away (and by the way CRAAPL accounted for 17% of the S&P 500's YTD performance until last night) as while correlation removes alpha so concentration removes liquidity.
Now that the market (and by market we mean AAPL of course) suddenly feels like it could have far less bid-side support, and hedge fundies, up until this point relishing that definitely certain year end bonus, are once again getting very nervous that the comp situtation could be a replay of 2011, we bring them some respite: because the only thing that can bring a smile to a PM with a red P&L is known that the guy down the street is redder. Below is that latest full breakdown of monthly and YTD performance courtesy of HSBC. And yes, as pointed out yesterday, it does seem that David Tepper, did Topper-tick the market...
BTFD/STFR Deja-Vu - check. Credit underperforming - check. USD higher - check. Treasury Yields lower - check. Ask an equity guy how today was and you'll likely get a shrug of the shoulders (unless he owns JPM or CHK); ask a credit guy (if you can pull him away from the bar) and you'll get a very different response. Investment grade credit markets were crushed today on the back of pressure on JPM's hedge and unwind expectations - this was across pretty much all the indices that are out there (with over 90 names in the IG9 index also in the on-the-run IG18 index - the numbers simply reflect the series or portfolio that is being referred to). This was the worst week in IG credit of the year and lifted spreads to 4-month wides and at the same time (until late in the day) high-yield and high-beta credit did not follow suit (very unusual and very indicative of the dramatic positioning in the IG indices that JPM has basically blown up). Treasury yields have now fallen for the 8th week in a row - the longest streak since 1998! Away from pure equity and credit, risk assets remained wildly unimpressed by the incredible 8 sigma rip-fest this morning in stocks as commodities all close lower from yesterday day-session closes - though bounced to end around their European open levels on the day (except for underperforming Copper). The USD leaked higher all day with a small interruption thanks to CAD strength on their jobs data this morning (AUD, EUR, and GBP all close at the week's lows). A horrible end to an ugly week as S&P 500 e-mini futures ended very close to their 50DMA on above average volume though low average trade size (which we suspect was dominated by algos in the rip this morning). The losses JPM faces from today's index shifts are already large and with risk managers everywhere asking their traders if they hold any of that 'trash', we suspect more selling and unwinds are to come; and while JPM got all the press, Morgan Stanley is now down year-to-date.
Months of hope that the economy could finally start a 'virtuous cycle' were once dashed in a puff of smoke, after the jobs report came and cemented that the economy is now rolling over and picking up speed to the downside. Only this time, in a very ominous development for the permabulls, the MORE QE IS COMING, BUY ON DIPS crowd was nowhere to be seen. Why? Because for QE to be unleashed everything has to tumble first. And in a harbinger of what is coming to the US, just look at Europe: the EuroSTOXX 50 just turned negative for the year.
With the plethora of mounting event risks, from the end of Operation Twist to numerous elections, the possibility of QE3, the US fiscal situation, the ECB/Bundesbank battle, and China's on-again-off-again economy, it seems finding a low cost long volatility 'bet' is the best way to gather some macro protection (aside from total liquidation that is). Earlier, we noted how expensive S&P 500 implied volatility had become relative to its realized vol - suggesting that being long S&P vol is not a low-cost option. However, as Barclays points out, GLD (and slightly less so SLV) is among the cheapest (defined based on percentiles of implied vol over realized vol) volatilities available. SPY vol is trading at a 60% premium to its realized vol while GLD is trading at a 20% discount. While the main risk to being long GLD volatility is a continued drift lower in realized vol, the current realized volatility is near the lower-end of its empirical range and there appear to be a number of catalysts, as we noted above, for gold (or hard assets in general) to break from its range-bound YTD performance in price and volatility (either up - more likely in our view - or down).
Equities suffered their largest single-day drop in 4 months as for once Apple was unable to single-handedly hold up the index letting it drop closer to its credit-oriented risk. A monster day for NYSE and ES (S&P 500 e-mini futures) volume saw Financials and Discretionary sectors underperforming and the Energy sector joining Utilities in the red for the year. The S&P closed at its lows as it broke its 50DMA for the first time since DEC11 as AAPL dropped 1.25% for the day (and -2.5% from the highs) but most notably equities and Treasuries are back in sync from early March as 10Y closed under 2% for the first time in a month. Gold and Silver surged around the European close, on little news, as we suspect safe-haven buying and an unwind of the gold-hedged bank-stress-test rally - with another relatively unusual divergence between Gold and stocks on the day. VIX broke above 21% closing just below it back near one-month peaks as the term structure bear-flattened (but notbaly pushing ahead of its credit-equity implied fair value). JPY strengthened all day (and AUD weakened) as carry trades were unwound in FX markets leaving the USD marginally higher on the day (and EUR marginally lower despite the turmoil in European markets). Oil fell back below $101.50 but it was Copper that has suffered the most - down almost 4% since Last Thursday. Credit markets were weak with HY marginally underperforming IG (beta adjusted) but still implying further weakness in equities as HYG closed just shy of its 200DMA.
Despite a grumpy open in the major cash equity indices - which opened pretty much in line with where S&P futures had closed on Friday morning - equity indices provided some BTFD reassurance for any and everyone who wanted to get on TV today. In sad reality, a lot of this equity index performance was due to Apple's 2% rally off pre-open lows, as it made new highs and vol continued to push higher. Financials, Industrials, and Materials all underperformed on the day (and Utes outperformed but still lost 0.5%). The majors were hurt most once again but remain notably expensive still to their credit-market perspective. On an admittedly quiet volume day (with Europe closed), the credit market (especially HYG) underperformed equity's resilience open to close but an after-hours reality check dragged ES down to VWAP once again on notably above average trade size and volume for the day. VIX managed top almost reach 19%, leaked back under 18 before pushing back up to near its highs of the day by the close - breaking back above its 50DMA (as the Dow broke below its 50DMA but the S&P remains above). Treasuries shrugged off the equity resilience and stayed in very narrow range near their low yields as stocks diverged once again (until after hours). FX markets were very quiet with JPY crosses getting some action as EUR and AUD managed to drag the USD down a little. Commodities were mixed off Thursday's close with Copper the major loser and Gold outperforming. Oil managed a decent intraday recovery today most notably back over $102. The weakness after-hours in ES (the S&P 500 e-mini future) is worrisome as its lost the support of AAPL and its options. At the cash market close, ES peaked for the day at 1382.75 and has since drifted back all the way to 1374.25 - just shy of the day's lows.
Pop quiz: What is the common theme among the following "best of breed" 2 and 20 (at least) hedge funds, whose YTD performance is presented below?
Silver remains the best performer YTD and the Long Bond the worst performer but what is most notable is the quiet serenity of the equity rally continued through March as Commodities, Precious Metals, Treasuries, and Corporate Bonds all lost notable ground post LTRO2. Is equity keeping the dream alive as the liquidity spigot has slowed to a drop (for now)? AAPL had it largest 2-day drop for almost 4 months into quarter-end - ending under $600 - and the broad S&P 500 pulled away once again from credit yesterday and today as IG, HY, and HYG close practically unchanged from last Friday's low but the ES up 15-20pts. Of the S&P sectors, Energy was the only one to fall appreciably post LTRO2 with Utilities the only sector in the red YTD -2.6% as Financials +21.5% and Tech +18.5% dominate.