Risk-On Drivers All Weak Today

Gold, silver, and the dollar performed well today and despite some early strength from equities, risk-on-related assets were set to pull equities lower calling the bluff of marginally better trade figures. Of course, with Swissy off the table from a safe-haven perspective (losing 2% against the USD today), gold benefited from the anxiety that Bernanke's 'shrug' provided. Unless the game-theoretic (bargaining) response from Republicans over whatever Obama proposes tonight is ignored, we suspect selling pressure will continue in equities as they adjust to life on their own for a bit.

A smorgasbord of risk-on drivers were unsupportive today (gold inverted for better context):


Treasuries were sending the signal of less confidence in QE3 to the rescue yesterday (as we noted in the earlier post) and this afternoon saw 2s10s30s drop further, back to NOV07 levels as the 10Y dropped below 2% once again. Credit markets saw modest net-buying in cash IG and HY though volumes were about average given seasonals - perhaps some fund-flow based action - as CDS were broadly wider with IG 3bps wider and HY 11bps wider in 5Y. Breadth was weak at 3 wideners to each tightener and while banks were all wider by 10-15bps (JPM/WFC excluded +3-5bps), TMT and Energy sectors were relatively weaker on the day.

After two days of very notable credit underperformance of equities, we saw some reversion in the relationship today with equities underperforming (we did note last night the disconnect between HYG and SPY into the close). Intraday IG16 was busy with a ~5bps range - ending near its wides.

Chart: CMA

The intricacies of the index vs. single-name options markets provided some additional color today as was noted earlier with the crash-tastic implied correlation of S&P index options rising notably even as talking-heads focus on the fear-indicator's 'only' modest rise today.

Charts: Bloomberg