Market Snapshot - What Happened?

A perfectly timed rumor that not only was unprovable but has potential merit (though has no ability to successfully 'fix' any of the issues that are rightfully staggering global equity and credit markets), was enough, combined with some awesomely-ironic VWAP reversion volumes to take the offer stack in S&P futures and squeeze weaker shorts enabling a miraculous run to the green finish line in ES today.

Having tested the 1130 level a few times overnight, S&P futures were increasingly anxious every time they reached down to this somewhat critical level and as we broke it for the third time during the day session, sure enough the China/Italy rumor hit as we pointed out earlier. Also, as we noted at the time, the half life of this jump was less than 30 minutes and just as we had fully retraced, the FT posted the story in full technicolor which realistically had absolutely nothing in it at all aside from the fact that a regular purchaser of sovereign bonds globally was meeting withe Italian officials last week (quelle surprise - sorry never learned Italian).

That was enough to take ES on a 4-5 Standard Deviation ramp-fest across VWAP and into the green for a wonderful evening of headlines about how we are all saved (just like the Port of Piraeus!!).

This move in ES was not totally unsupported as the EUR pulled back to its best levels of the day - dragging DXY just very modestly into the red for the day. Its worth noting that SEK was a major underperformer today relative to the US (down over 3.5% at one point before the late day ramp). Carry pairs were aided by the relative JPY selling as the day wore on and oil and copper rallied (the latter remained just red on the day as the former managed an almost 2% gain on the day). Silver and Gold seemed to suffer from liquidation early on but recovered some of the day's losses as the dollar rolled lower in the afternoon.

TSYs sold off as ES rallied but yields dropped in the last few minutes of the day even as ES powered into oblivion. notably 5Y underperformed +6bps from Friday followed by 2Y +3.6bps, 10Y +3bps, and 30Y +0.5bps.

Credit did behave 'differently' though - as is often the case and we note a few interesting tidbits: 1) there was net-selling in HY cash markets today - something we haven't seen in a while, 2) while HY did rally back into the close it remained 5-10bps wider on the day in 5Y but was very ugly in the less liquid 3Y (last we saw was 30-40bps wider!!), 3) IG rallied back also with ES but underperformed notably and ended the day 3-4bps wider of Friday's close, 4) IG9 (which matures Dec2012) was very ugly also - decompressing notably as those nasty tail names remain under pressure from the heavy-handed high gamma crowd in the tranche space, 5) HYG/JNK did not have as much fun into the close as stocks did (something we have seen again and again and tends to be a signal that equity was a little over its skis).

Charts: Bloomberg

Drilling down a little into equity and credit - we note XLF managed to gain 1.3% today but credit spreads were all wider: Citi +15 to 262bps, MS +14 to 350bps, BAC +8 to 370bps, GS +9 to 264bps. Builders were hit particularly hard after Fitch's downgrades of the entire housing market outlook and Insurers did not come back off their wides that much as the equity rally ensued. Interestingly in CMBX land - we saw (yet again) the long correlation trade (betting on increasing systemic risk) as seniors underperformed juniors and we also note (in with builders stress), ABX tranches were weaker pretty much across the board.


On a broad-based risk-asset basis, ES was supported up to around 1150-53 but ES accelerated notably expensive from there. After the day session close, the risk-basket is leaking lower as ES pushes incrementally higher. Add to this the fact that VIX closed up on the day as did Implied Correlation (though both well off their intraday highs) and that as we rallied the last 5-10pts in ES, we saw average trade size rising notably, we suspect professionals were selling into strength once again - though these squeezes always seem to move more than many believe recently.

From a cross-asset class perspective, those with a bullish bias would be better positioned adding to HY longs here, and those with a bearish bias should prefer to use equities. In relative-value land, a HY-IG compression - modestly hedged with an equity short should perform well if we remain range-bound.


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