Credit Outperforms Stocks As Asset Correlations Deteriorate Further

Thanks to disappointing macro data early on and better-than-expected European auctions (and ECB not cutting), the EUR went bid early on, accelerate after the Europe close, and stayed that way for most of the day (EURUSD squeeze? or ES-EUR convergence?) ending a one-week highs. Typically this USD weakness would juice stocks (and to some extent it did this afternoon post-Europe) but once again it was more AUDJPY driving late (odd) strength in stocks as Oil prices cratered on Iran sanction delays (dragging energy names lower). Treasuries oscillated in a 4-5bp range before and after the auction ending close to unch (very small steepening). Credit markets gapped tighter around their open (thanks to Europe's early strength) but leaked back as the morning wore on.  

Stocks underperformed credit overall as IG and HY credit rallied into the European close and held gains - while HYG (the high yield bond ETF) significantly underperformed on the day (compressing its NAV premium further despite a modest late day pullback) which should be mildly concerning for bulls (given the size of flows and momentum behind it recently).

ES (the e-mini S&P futures contract) converged with VWAP and CONTEXT around lunch then pulled higher into the close managing to tag the day-session open but broad risk-drivers did not participate so much (and we saw higher average trade size volume come in covering at the close).  Volume ended about average for the year in NYSE stocks and ES (though still well down from December).


HYG (green) underperformed out of the gate (as IG and HY credit outperformed). Stocks (blue) managed to get back to their day-session open highs (but notably off overnight highs).

Heading into tomorrow's JPM call, financials managed a rally on the day overall (XLF +0.4%) and while most managed solid rallies back towards their opening highs on the day, BAC (notably) did not - clinging to its VWAP -1.4% on the day with heavy volume at the opening selling over $7. Yesterday's stabilization in major financial CDS did not hold and they extended their gains today (maybe GS and JPM slightly widened into the close). Energy names obviously underperformed on both NatGas and then the late Oil drop.

The USD (DXY) fell back to Tuesday's lows and held it while EURUSD dropped to one-week lows over 1.8. Cable (GBP) remains the week's worst performer against the USD and we note the significant rally in swissy today (extending yesterday's gains).

Oil is down 2.3% on the week (sub $99) seeing its biggest 2-day drop in a month and while Gold and Silver leaked lower from midday highs, Copper managed to hold onto its gains (now up over 6% on the week).

Al-in-all, more of the same small open to close range in ES, volume low relative to December, divergences between credit and equity, and correlations breaking down. Medium-term ES is a little expensive relative to broad risk assets (CONTEXT) and credit markets but they are converging as credit gaps again.

HYG was the only standout to us today that sent a worrisome signal and we note that implied correlation is still leaking higher (demand for macro/index protection remains relatively higher than underlying single-name activity). Implied Correlation is at its highest since01/04 and VIX sub 21 near its lows (though we note the steepness of the short-end term structure and cheapness of vol relative to credit suggests Vol is due to rise in the short-term)

Charts: Bloomberg


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