Risk Focus Reverts From FX To Stocks/Credit With Weak Ending

A roller-coaster week ended on a negative note as equities and credit ended the day only modestly lower but having sold off relatively decently from the highs just after the open. Equities spurted out of the gate in the day session, not followed by credit (or HYG) or broad risk assets (CONTEXT), only to revert quite quickly and then push notably lower as the Fitch news broke. Equities overshot to the downside relative to broad risk assets - though we note that TSYs were bid all day long, ending the day at their lowest yield and flattest curve levels. The afternoon then saw HYG (the high yield bond ETF) pull higher and higher as equities and credit spreads stagnated, with a weak close in stocks and strong high volume close in HYG (well above VWAP) as credit flat-lined. Gold and Silver managed solid gains on the day, extending the recovery but closing under the psychologically important $1600 and $30 respectively. FX 'wiggled' around today but ended with a small bearish USD bias by the close as the pre-European close action dominated once again ( as we note the $20bn in custodial bonds sold this week in more repatriation flows). It seems attention has shifted back from FX to bonds and stocks (with intraday stock vol picking up quite notably today) as the week rolled on and that sentiment is less than positive despite some technicals (from the forthcoming CDS roll) - even as HYG remains in a world of its own.

There was relatively decent agreement between ES (the e-mini S&P futures contract) and IG (investment grade) and HY (high yield) credit derivatives today. Equities overshot to the upside on each of the upswings - which maybe suggests a little what the path of least resistance is but we note that we ended the day on a sour note (and obviously Belgium's downgrade won't help). HYG (the high-yield bond ETF) performed its typical flow-driven magic, ignoring any sense of underlying value (which we suspect it pushed back to recent NAV premium highs today) and ending at the highs of the day after pulling to VWAP on volume and then with significant end of day volume (on what was a relatively weak volume day overall). We suspect the technical flows from the CDS roll next week (and arbs), as we discussed earlier this morning, are impacting but the sync with stocks suggests a similar risk attitude - which is clearly not in sync with HYG.

Treasuries also were in a significant risk off mode for the latter part of the week - despite the repatriation flows - and ended at the low yields of the week. We also note that 2s10s30s suggested a lower ES close today - even as FX carry and commodities suggested more positive close. CONTEXT was generally a lot less volatile than ES today - especially this afternoon.

Metals have staged quite a bounce off the Gartman bottom-calling exit liquidation flush mid-week. Silver is up 5% off midweek lows and Gold 2% (as copper outperformed gold off the lows). Oil continued to slide lower - tracking a similar path to stocks on the week. All of this as the USD basically flatlined from mid Thursday onwards.

There was a mild drift lower in the USD from midweek, as GBP rallied and JPY stabilized - bucking the more sideways EUR movement. There was plenty of vol but it was very much in bursts with significant reversion.

One final note of caution, implied correlation is once again bearishly diverging from index vol (VIX) the last two days suggesting dealers happy to buy systemic protection - in a similar vein to credit.

All-in-all, not a very inspiring end to a poor week. European sovereign spreads leaked off into the close, credit and equity closed the week much closer to the week's lows, and the pull back in Gold/Silver and the strength in Treasuries suggests some more safe-haven flows was beating out risk seekers. IG credit outperformed HY (as we point out that both closed wider today than their wide prints from Wednesday while ES remained above those lows) as up-in-quality dominated credit and correlations dominated equities for the latter half of the week.

Chart: Bloomberg