Another day, another 12 swings of greater than 0.75% in S&P futures as volume slid to the lowest in a week and second lowest in two weeks. Credit and equity markets stayed largely in sync (as they have for the last few days - with slight beta-adjusted underperformance of credit) until around lunchtime and then a funny thing happened to investment grade credit.
At around 12:30ET, the most liquid credit index, IG17, gapped tighter as ES and HY reversed briefly off the highs and then IG did not stop - compressing 3-4bps more into the close - notably outperforming HY and ES (its far higher beta cousins).
At the same time, the less liquid but hugely levered (and exposed to correlation traders, tail-, and jump-risks), IG9, cracked very notably tighter (from our runs around 15bps) to 147bps. IG9 had held up as markets rallied but this move's magnitude and velocity suggest more than just some hedge adjustments and while the rest of the risk assets we cover were all levitating, this 'capitulation' stands out among them. Certainly that move in IG9 - with its accompanying on-the-run hedging - is likely what helped IG17 dislocate from equities today and we wonder if it was the ammo the market needed to exhaust as we head into tomorrow's NFP extravaganza.
After Europe close, FX markets went into drift mode as the dollar just leaked to one week lows with EUR managing to hold well above 1.34 and all the majors (apart from swissy and cable) made new highs (vs USD) for the week). CAD is the best performer since Friday and once again we note JPY's stability - something perhaps Mr. Trichet should look t.
TSYs never looked back once Europe had closed and are now notably higher in yield on the week with 2s10s30s at 75bps now 8bps higher on the week and an impressive 25bps off Tuesday's lows. We suspect the 2s10s30s carry trade that we discussed so much last year (and prior to Twist) is back in play again, helping fuel some of this re-risking of the last few days. Arguably at current levels, 2s10s30s suggests ES should be 1175-80 so perhaps the underperformance of ES suggests that early fuel is running low.
Commodities kept on trucking today with oil taking out $82.50 (up 9% from Tuesday's lows) and Silver clearing $32 (up almost 12% from Tuesday's lows). Gold is behaving relatively well given the chaos surrounding it - stabilizing around $1650 and holding around 1.75% higher on the week, which compared to only a 0.45% loss in the USD seems reasonable for anyone.
After leading risk down, ES seemed to be leading it higher also in CONTEXT over the medium-term and in the short-term, thanks to the moves in 2s10s30s and oil (as well as AUDJPY), equities remain cheap here - believe it or not. However, the correlations have been incredible and this feels like a light switch wil flick and reverse it. The most clean signal we have of relative performance is longer-term against HY and equities remain expensive. Moreover, a model we often look at with regard to SPY in the context of TSYs and IG credit (IEF and LQD) is very much at the top of its highly mean-reverting channel - suggesting if nothing else that equity needs to pause for bonds to catch up. It seems that tomorrow's NFP will be the center of attraction though little action this week seems predicated on any fundamental analysis of what is an increasingly concerning endgame overseas - the focus on a localized domestic (US) point-in-time print when all around us is asunder, seems fickle at best and ignorant at worst.