Oil Angst Obfuscation

Overnight action saw EURUSD surging over 1.33 and retracing back into the US open as broadly European equity markets started to play catch up to European credit's recently weak performance. Couple that with a miss in jobless claims and the rise in WTI and Brent prices and shortly after the US open S&P futures fell 9pts rather rapidly. However, fears of margin compression or consumer spending impacts were quickly dismissed as every asset class took off and never looked back - as only one thing matters (and USD weakness and commodity strength confirmed that belief). Having underperformed the last day or two, HY credit jumped higher, catching up with IG and HYG's recent performance and over-taking stocks, as high beta took over again on the heels of what can only be assumed is central bank largesse as financials and energy names outperformed. There were some 'odd' disconnects among the broad asset classes today with Treasuries rallying euphorically after the strong 7Y auction, Gold rallying well and then losing a lump on a Zero Hedge margin rumor, and up-gaps in EUR (and down in USD) into the close to sustain the rally. While Oil was notably higher on the day, Silver took the honors - now up over 6% on the week - as Brent-WTI compressed this afternoon as the latter pushed above and held $108.5. The Treasury-Stock disconnect continues to grow, and yet when we adjust for the USD-numeraire, the two asset classes agree wholeheartedly on low-/no-growth - perhaps it is time for the 'transitory' word to re-appear.


Credit markets (red, dark red, and green) all took off today with HY credit spreads outperforming as they all shurugged off European weakness and early stmubles (black oval) with high beta rotation back in vogue.

The early tumble (1) occurred across all asset classes (with TSYs rallying, gold dropping, USD strength, and stocks down) but quickly forgot all about that and went about its business - led by Gold. The 7Y Treasury auction (2) was very well bid and the whole complex rallied considerably on that news - every other asset class ignored it. Towards the close as momentum had good hold of stocks (and Treasuries were leaking back a little), we tweeted a rumor of a margin hike (3) and Gold stumbled $5 instantly - followed quickly by a jump in the EUR (drop in the USD) which sustained the end of day strength in stocks (despite all but financials dipping into the close).

FX markets were a little more volatile than recent days today but the surge, retrace, and resurge EURUSD move has shifted it all the way back up in line with our longer-term EUR-USD swap spread model's fair-value. While this does not helkp with direction per se, there is less bias for sure to the upside now as 'one fundamental' has re-converged. The last time this happened (Aug/Sept 11), EUR overshot to the upside before settling back down so perhaps we will see that next. For sure it is impacting the USD and implicitly commodities and everything else.


Silver and Oil were the standouts on the day and week with copper still lagging but well up still as the USD weakens.

Oil dominated the chatter today but little to no special attention was paid to the reality of margins circling the drain should this 'transitory' tax hike stay in place as it did almost exactly the same way last year. Brent and WTI are ratcheting higher with the spread oscillating between $15 and $18 as it rises. With WTI having caught up 'analogously' to Brent, it is Brent's turn next to drag the pair higher seemingly.


The disconnect between Treasuries and stocks today was self-evident but this disconnect has been growing for much of the last 6-9 months as talking heads want to 'judge' which market is right (low-/no-growth Treasuries or high-growth stocks). The problem is very straightforwardly solved. If we adjust the S&P 500 for its USD-based numeraire (i.e. rebase it to something that is stable in 'value'), then in fact the two market agree wholeheartedly that we are in a low-/no-growth environment and it is only the USD-numeraire of stocks that is allowing their nominal value to rise. We have discussed this at length recently but thought it instructive to see the charts above and below for a sense of the different realities that can be perceived.

From the lows in March 2009, Treasuries and a non-USD numeraire stock market measure have been very much in sync as they have adjusted for a 'new normal' that only transitory central bankers could be so afraid of. That is until they see the gas-price-governing factor on central bank governors printing prowess come to fruition.

Charts: Bloomberg

and today's bonus chart (by request) is the exuberant squeeze higher in Sears' share price relative to the modest shift in the bonds and CDS, trad accordingly.


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