ES -2% As Volume Surges

Equity and credit markets are in close sync as broad derisking is evident everywhere. Energy, Materials, and Financials are the underperformers. HYG, the high-yield bond ETF, is notably underperforming both equity and high-yield credit spreads as its momentum-chasers exit fast and professionals find it the easiest / most-liquid instrument for hedging.

We have talked extensively about the bond-stuffing we suspect has been going on with HYG and we worry that an extende period of weakness could force creation units to be removed (uncreated) which will force selling into the cash HY bond markets. This is the exact reason that professionals have been stuffing HYG to avoid any real secondary pricing adjustments and the illiquidity. Equities are already notably rich relative to HY credit's outlook but if we see forced selling in HY bonds, then expect equities to drop significantly further to meet with reality.

Spanish bond spreads are at the day's wides (+30bps) as the rest of the core and periphery are also seeing spreads leaking wider. EIB bonds are 4bps wider as EFSF is 7bps wider - contagion is spreading to the core very rapidly.

CONTEXT is pointing to significantly lower ES here as TSY 2s10s30s and Oil (as well as AUDJPY) are the main drivers.

Chart: Bloomberg


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