Broad Risk-Off Day - Apart From Stocks

Today was another tale of two worlds as stocks outperformed everything as broadly speaking risk assets leaked notably lower post Europe's close and accelerated post Nowotny. Financials led the exuberance (in stocks not credit) on a day when volume was certainly not terrible and credit market indices tracked stocks (ES) almost tick for tick (which along with desk chatter suggested little activity in credit today as credit dealers reracked along with futures movements). HYG dipped significantly into the close - after a decent drop in the middle of the day that was saved - only to be held up by its VWAP. For the second day in a row, VIX closed higher on a higher S&P close and implied correlation is sending those trend fade warnings once again but it was the broad-based disregard for any and every other asset class today (by stocks) - as Treasuries remained near their low yields of the day, Crude, Gold and the commodity complex all sold off, FX carry reverted back to risk-off after Europe closed, and apart from a minor leak higher in the last hour bond curves were notably flatter - that was surprising (and unusual in recent weeks/months). In the medium-term, credit remains considerably less sanguine than stocks here and the late day disappointment from Nowotny ahead of LTRO2 may have just taken the jam out of the equity market's doughnut for now.

The trading day seemed broken into 5 segments. Through the European market (early morning), risk was leaking lower broadly speaking as all asset classes stayed together. Then around 8am ET, Crude and Gold took off while the rest of risk assets deteriorated (looked like a QE/LTRO trade), then as the US opened, risk assets awoke broadly even as Treasuries remained at their low yields of the day. This print-fest-prone action lasted until Europe closed at which all momentum was lost. Stocks leaked higher as broad risk assets drifted lower (and Treasuries remained bid). Then finally Nowotny's comments incited some realization that the ECB is really not (at least not yet) a bottomless pit of money for everyone to borrow and lever forever, which saw commodities leg lower, USD leak higher, VIX accelerate higher (inverted on the chart), and even stocks give some back (as AAPL and the financials also gave some back right at the death).



HYG tried and failed in the middle of the day to sell-off as once again a decent drop was saved from nowhere (as it crossed Friday's closing VWAP and today's VWAP at the time). Credit indices tracked rather remarkably well to ES for a change, suggesting little actual flow occurring - although we do note that when HYG dipped, so IG and HY were also underperforming - only to catch up at the close.



Trying to put today's equity strength in CONTEXT, the following charts may help. Upper left shows the equity ETF (SPY) diverging upwards notably away from its empirical relationship with Vol (VXX), rates (TLT), and credit (HYG). Upper right shows the more broad-based CONTEXT (our proxy for risk assets overall) deteriorating from around the European market close - even as stocks leaked higher and higher.

In the lower left, our VIX model (based on equity/credit/vol relationships) was once again very informative as the aggressive open to VIX (over 19%) was well above where equity and credit would have thought. VIX compressed back to 'fair' but there was a clear demand for macro-protection as it pushed higher into and after the European market close. The last hour of the day saw correlations (lower right chart) start to pick up once again as equities regained some sanity and drofted lower with risk assets.


FX was volatile with a slow drift lower (vs USD) broadly into the US open (aside from JPY which gained over 1% from Friday's close). AUD rallied handsomely to drive broad risk assets up on carry but as Europe closed all that exuberance faded once again and we limped lower in JPY and USD and sideways in EUR and DXY broadly - to end with the USD +0.2% or so from Friday's close.

Commodities were extremely volatile as tomorrow's LTRO print-fest remains front-and-center. WTI wobbled around $108-109 but eventually lost $108 post Nowotny - even though the Brent-WTI spread was stable around $15.5 all day (since Thursday now). Gold is modestly down (along with Silver) as they tracked USD's moves with a higher beta today.

Treasuries rallied almost 7bps in the long-bond today before giving a little back into the close and 2s10s30s dropped 4-5bps overall dragging risk off in general.

Charts: Bloomberg and Capital Context