Gold Rips And Stocks Dip As Risk Assets Recouple To Reality

If we had a penny for every equity rally away from credit reality that converged back to credit's less-hopiness, we would now have made 5 pennies in the last 6 trading days. We pointed out last night that equities surged into the close on small average trade size as credit remained far less sanguine and the now-ubiquitous open in Europe started the reversion as stocks fell rapidly, below Friday's close - tracking back with high-yield credit's deterioration. HYG gave up yesterday's gains and pops back under fair-value but rather notably, investment grade credit (IG) underperformed significantly today - which is unusual in a sell-off day and signals either more fallout from JPM reaching for hedges (IG9 10Y 166bps offered +5bps) or investors grabbing the cheapest macro overlay from a carry perspective.

The S&P 500 e-mini futures (ES) contract saw its worst loss of the year...

Treasury yields dropped the most in 7 months leaving 10Y at record lows and 30Y close.


Either way - not a good day for credit or equity markets at all with Energy and Financials bashed (-3% and -2.3% respectively) but YTD (chart below), financials remain +6.8% versus energy's -7.1% performance. The major financials crumbled today.

Gold and Silver outperformed admirably on the day, however the upward move appears to be more of a reaction back to equity, treasury, and USD reality as the afternoon saw the 4 markets recouple and trade together (after disconnecting notable yesterday).


Oil was crushed (hence energy above) to $87.60 by the close, now down 3.6% on the week and Copper didn't do much better on the day - leaving gold the week's best performer (down only 0.5% - admirable with the USD up 0.82%).

The EUR just kept going today with no real change post-European close (apart from Gold's reversion), which is unusual, closing well below 1.24 on its biggest drop in 5 months. JPY strength (red arrow) suggests more carry unwinds and repat flows to drive JGB curves even more inverted (as Swiss 2Y moves more negative - touching -20bps today).


Both implied correlation (systemic risk) and VIX (normal vol) jumped higher today as the latter moved almost 3 vols to close above 24% (its biggest pop in almost 3 months). A heavier volume open at highs, close at lows day for stocks with little to signal capitulation in terms of trade size - and across broader risk-assets, stocks appear to have room to fall.

While broad risk-assets (as proxied by our CONTEXT model) deteriorated significantly more than stocks today (mainly driven by Oil, TSY 2s10s30s, and TSY level changes - though FX carry was also negative) tending to bias us to expect more weakness overall - we are more concerned by the increase in correlation (lower chart) which tends to occur when risks start to become systemic (which also fits with the lack of any bounce into the close in stocks)...

So worst loss of the year for ES, financials fubar, systemic risks (VIX, implied correlation, and realized cross asset correlation) are soaring, no bounce in stocks and bonds at record low yields - apart from that, what is there to worry about?

Charts: Bloomberg


Bonus Chart: the S&P 500 e-mini futures saw 1315 (a level at which we closed 4 of the 5 trading days last week!!) as a major auctioning point today - but eventually we fell through, with a truly ugly close...