Capital Context Update: OPEX Omnipotence

From Capital Context

Aside from the pre-open activity
surrounding the ECO data,
volume was well below
average  in S&P futures today

S&P futures closed at their highs, thanks to a late (after-hours) 5pt pop to end the week at what appears like a critical support level (same as last Friday's swing low and Wednesday's pre-open swing high) as it seemed option expirations and an incessant focus on the VIX (which we have discussed at length as being less than relevant currently - see Midday Movers today for more color) had a pull of their own to whoever was trading. As we note in the upper chart, volume was abysmal once again (not just for S&P futures but for NYSE in general it was on par with recent low averages - which for an OPEX is negative).

Credit closed near the tights of the day, as equity outperformed both IG and HY for the first time in over a week, but was notably shy of Wednesday's tights (as opposed to stocks which traded and held at that day's highs). We also note that fairly significant technicals were impacting the major credit indices in credit derivative land as the monolines (most specifically MBIA in this case) saw major compression on the back of the mortgage settlements. In fact the compression in the latest HY index was almost entirely due to MBIA's compression alone (2.4bps of the 3.1bps that HY16 intrinsics tightened today). The MBIA compression was even more marked at the short-end of the maturity curve (relatively speaking) which notably compressed legacy investment grade indices and we are sure involved some hasty index hedging (in the on-the-run IG) by the correlation desks (as the monolines are such frequent members of CDO underlyings).


The excuse that the macro-economic data's relative improvement (or lack of serious misses) was what saved the market today given the poor earnings and performance of BAC and GOOG is a little weak in our opinion as there really was very little rerisking going on in any markets. Stocks were pretty much in a world of their own with 2s10s30s not playing along, AUDJPY (or any carry pairs) not helping much, gold and silver at new highs, oil breaking back above Goldman's downgrade level, individual name vols generally rising, vol skews steepening, vol term structure steepening, and of course credit not conducive (US limped better and EUR was very weak). Trying to pin action down to this or that factor is irrelevant on a day like this and we leave it to your opinion to consider if it was anything but opex momentum and pin action.


US Treasury yields slid nicely all day,
helped early by Europe and later by POMO

Europe was the story of the day, although it quickly disappeared off the radar once it had closed and talking heads could focus on the 'market's resilience' and how low VIX was (sigh). A gentle drift up in the USD (based on DXY, ADXY, and TWI), thanks to some impact from EUR weakness was not enough to slow commodities down (and we note Silver offered above $43 in late day trading!) and while stocks levitated, US Treasuries saw yields drop (buying) aided by some lunchtime POMO of course.

5y saw the largest absolute yield compression (9bps) while 2s and 30s were about the same at 5-6bps and 10Y -8bps - hence the butterfly compression against equity improvement quandary.

The fact that stocks rallied late with very little impact on Treasuries combined with the late grab for silver and gold makes us wonder if something is coming from Europe this weekend?

Maybe most noteworthy in the credit/govvie complex was the underperformance of Bunds relative to Treasuries as 10Y TSY to Bunds dipped to 2bps (-4bps on the day) closing at 3bps, near the 0.5bps lows in NOV09 and jun09 when we first broke positive post crisis. We have discussed previously the rise in Bund yields, both inflation and rate hike-driven expectations, but we wonder that with the EFSF mechanisms starting to show whether this is more buanced and investors are pricing in the implicit risk transfer from periphery to core.

The cost of protecting German
sovereign debt briefly fell
below that of the USA late
last week but has increased
over 6bps this week alone.

Merkel and her mates won't like it but we point out that the cost of German protection has risen 6.5bps this week alone to 45bps with Germany shifting back to being more costly than the USA after creeping inside briefly late last week.

Contextually , the same theme of the last few days remains in place with vol and CDS being derisked for lower quality names and relatively rerisked for higher quality names. Stocks were a much more mixed bag today with crossover names outperforming the high and low quality names on average. Financials (monolines aside) were the only sector in which equity and credit deteriorated together on average while equity outperformed credit in all the others (aside from Telecoms which saw slightly more spread compression than the equity moves would have assumed).

All-in-all , a mixed bag that definitely didn't feel as positive in vol or credit as stocks made it look and even though index values improved, we remains cautious. Our credit-equity disconnect gauge has reverted back to fair, bottom-up, and while top-down we still see room in our ETF Arb , the z-scores have come in and we will start to consider lifting the trade at a healthy profit early next week (short at $17.4, closed at $15.5).


What can we say - bloodbath. Denmark was the lone sovereign CDS market that did not deteriorate today (though liquidity there is anything but clear in credit land) as the PIIGS rose 20bps on average to an average of 540bps with Greece the stand out as they started to sell off islands and boats (sarcasm sorry) and their 5Y CDS broke 1150bps (157bps wider on the week) and the cash markets crushed in the short-end with even 2Y blowing out (only to be followed late in the US day with some ridiculous comment that debt levels ARE sustainable). Ireland was not pretty either and Spain broke above 230bps back to mid March levels and notably pulling away from Italy.

This obviously impacted SovX (the most liquid credit index represneting sovereign risk in Europe) as it popped 5bps to 177.5bps (and intrinsics over 6bps). GDP-weighted sovereign risk in Europe rose another 4bps today to 124bps (17bps on the week!) and yet the EUR (vs the USD) fell only 50pips or so on the week (perhaps reflecting the relative perceptions of these two currencies better than structural weakness in the Euro-zone - though of course this morning's inflation data over there didn't help).

The sovereign fears spread (rightly so) to financials and we saw subordinated financial debt spreads jump a little more (especially relative to seniors). Banks were the worst hit but it is starting to leak into non-financials once again also as the trend of Main Ex-FINLs (the most liquid corporate credit index in Europe) actually increased in risk the last 2 days along with its financials brother. XOver did not shift so much, perhaps due to a lesser financial-contagion aspect but Dixons managed some solid gains that spurred it on and rather surprisingly given Greece's situation, Hellenic Telecoms was also a solid performer on the day. CEEMEA was mixed with no real theme among the names but it outperformed SovX


Good overnight performance in Asian corporates and sovereigns - perhaps as all attention focused on Europe and pulled our bleeding eyeballs from Fukushima. ITRX Japan (Japanese corporate credit index) recovered yesterday's losses and gained a little more as Asia ex-Japan continued its +/-2bps hop around this week.

Australia saw its first compression day of the week with an almost notable them of financials outperforming non-financials - which is against the trend of the last week or so. This was the same theme we saw in Asia - that of financials outperforming - we humbly suggest this was part of a relative-value play against Europe/US banks as opposed to any vehement positivity.

Index/Intrinsics Changes

CDX16 IG -1bps to 94 ($0.04 to $100.23) (FV -0.43bps to 92.81) (26 wider - 66 tighter <> 65 steeper - 53 flatter) - No Trend.

CDX16 HVOL -0.8bps to 153.2 (FV -0.47bps to 152.27) (10 wider - 16 tighter <> 14 steeper - 13 flatter) - No Trend.

CDX16 ExHVOL -1.06bps to 75.31 (FV -0.42bps to 74.75) (16 wider - 80 tighter <> 45 steeper - 51 flatter).

CDX16 HY (30% recovery) Px $+0.13 to $102.44 / -3.1bps to 439.9 (FV -3.03bps to 431.9) (35 wider - 53 tighter <> 56 steeper - 43 flatter) - Trend Wider.

LCDX15 (70% recovery) Px $+0.05 to $101.375 / -1.14bps to 238.37 - No Trend.

MCDX15 -2.5bps to 147.5bps. - No Trend.

ITRX15 Main +0.77bps to 97.77bps (FV+0.44bps to 100.82bps).

ITRX15 HiVol +0.5bps to 136bps (FV+1.17bps to 134.52bps).

ITRX15 Xover -1.04bps to 367.96bps (FV-2.58bps to 356.94bps).

ITRX15 FINLs +3.25bps to 131.25bps (FV+1.04bps to 134.75bps).

DXY strengthened 0.26% to 74.88.

Oil rose $1.33 to $109.44.

Gold rose $11.72 to $1485.9.

VIX fell 0.95pts to 15.78%.

10Y US Treasury yields fell 9.6bps to 3.4%.

S&P500 Futures gained 0.35% to 1314.8.

Spreads were tighter in the US as all the indices improved. IG trades 2.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.9s.d.. At 94bps, IG has closed tighter on 128 days in the last 590 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 17.9bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.9s.d. and at 439.88bps, HY has closed tighter on only 55 days in the last 590 trading days (JAN09). Indices generally outperformed intrinsics with skews mostly narrower. Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 2.4bps.

Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 2.9bps, and stocks outperformed IG by an equivalent 0.3bps - (implying IG underperformed HY (on an equity-adjusted basis)).

Among the IG names in the US, the worst performing names (on a DV01-adjusted basis) were CA, Inc. (+2bps) [+0.02bps], MDC Holdings Inc (+2bps) [+0.02bps], and United Parcel Service Inc. (+1.86bps) [+0.02bps], and the best performing names were Loews Corporation (-4.5bps) [-0.04bps], Marsh & McLennan Companies, Inc. (-3bps) [-0.02bps], and Anadarko Petroleum Corp. (-3bps) [-0.02bps] // (absolute spread chg) [HY index impact].

Among the HY names in the US, the worst performing names (on a DV01-adjusted basis) were Energy Future Holdings Corp. (+27.94bps) [+0.19bps], Nova Chemicals Corp. (+8.72bps) [+0.09bps], and Residential Capital, LLC (+8.19bps) [+0.08bps], and the best performing names were MBIA Insurance Corporation (-339.98bps) [-2.23bps], Liz Claiborne Inc. (-18.11bps) [-0.17bps], and First Data Corp (-16.1bps) [-0.15bps] // (absolute spread chg) [HY index impact].


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