Market Round-Trips To Yesterday's Open

Whether it was FX majors, the Treasury complex, or the economically-sensitive commodity markets, the 'negative' shift from yesterday's open (USD up, TSY yields down, Commodities down) plateaued overnight and retraced throughout the day today. Equities and credit however managed to make new highs (while all these other risk-related assets did not) as they stayed in sync for the afternoon (double-topping on lower volume) as financials outperformed (MS +5% for example) on what we can only imagine was Greek rumors (which later proved as usual to be completely false). Oil dropped markedly into the close, heading for $97 as Gold remains the week's winner (though Silver and Copper won on the day). The USD is flat (leaking higher in the late day) to yesterday's pre-market after trying and failing at 1.32 against the EUR (which is the underperformer vs USD on the week for now -0.48%). Treasuries sold off, adding 3-7bps across the curve (though still lower yields on the week) and while 30Y underperformed, 2s10s30s did not move much as the rest of the curve pivoted. The last 30 mins of the day saw ES pull back from its lonely highs to test VWAP (and IG and HY credit also fell with it) as open to close, credit underperformed, and cheap hedge IG was moving more negatively than beta would suggest. By the close, ES had pulled back (lower) to converge with CONTEXT (proxy for broad risk assets) and fell below VWAP as once again average trade size picked up significantly to the downside.


Treasuries sold off but merely retraced into the early range from yesterday. Some of this could perhaps have been rate locks on the sizable IG issuance we saw talked about and coming to market today. Note that this was very high quality IG names in general and so was well accepted - this is no signal that markets are wide open and embracing risk in primaries (and flippers beware as the liquidity premium is perhaps worth more than the compression in spreads as secondaries and off-the-runs are very stale now).

FX markets showed the exact same pattern of (in this case) USD strength, plateauing, then selling back and stabilizing at those pre-US open levels from yesterday. Dispersion is perhaps a little higher but critically, there was no higher high in EURUSD (lower low in DXY).

Copper outperformed on the day off low levels at its close but the same pattern that was so evident in TSYs and FX was also clear here. Gold obviously did not dip much and kept leaking higher on the week testing $1750 once again. Oil lost significant ground into the close (and Copper rolled over) as Silver stabilized with its non-fiat friend Gold.

ES pulled back down to its VWAP at the close to end back at the same roundtrip levels as the rest of our risk drivers. This is very evident in the chart showing ES vs CONTEXT as this afternoon, broad risk assets leaked lower and then ES started to catch up with it pulling close to 'fair' by the close.


Financials (especially the majors like MS) gave back some considerable gains into the close but the financials ETF was still the winner +1.6% on the day.



HYG saw its ex-dividend today so comps to yesterday are irrelevant (but we note that HYG was well synced overall today until late on when it sold off harder than we would expect given stocks and HY moves) but the correlation between equity and credit the last few days has been very high (and suggests much more reracking than real trading in credit derivatives).


We have discussed the excitement in HY markets a number of times recently. The chart above shows that the most liquid HY credit derivative index (HY17) is now trading almost 50bps rich to intrinsics (its underlying value based on the portfolio of names it is comprised of). This is a huge difference (the kind of which that tends to occur at turning points as indicated) akin to the S&P 500 trading at 1300 while its 500 underlying stocks implied a fair-value of 1180. The credit market is not as easily arb'd (though we suspect it soon will be given this level of 'skew') as in the HFT electronic equity markets but this shows a very clear willingness to sell protection (or unwind shorts) and combined with the very high levels of advance-decline in HY and IG bonds (below), suggests the euphoric reach for yield is perhaps getting a little toppy (especially with the growing level of negative convexity oin HY cash prices).



All-in-all, the late day action in credit and equity indices was not very pretty and seemed to just play catch up to the lack of excitement in the other risk drivers that we track. Its becoming abundantly clear to anyone who is watching that fading rallies on Greek Deal news is the new Trading 101 strategy and the state of the relationship between Greek politicians, their countrymen, and the European leaders just does not suggest anything but Greece unilaterally stepping away, refocusing on the social contract, huge devaluation, and jump-starting tourism. Simple and painful.

Charts: Bloomberg and Capital Context


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