Stocks Tumble As No Hail-Mary Rumor Materializes

With the S&P closing -2.5% led by another financials sell-off (-4.3%), the long-hoped for late-day-rumor failed to appear and save the knife-catchers. The major credit indices modestly outperformed equities today although the after-hours (Greek govt is not collapsing) rally-monkey dragged ES (up to VWAP) closer to credit's performance as stocks closed back to 10/21 levels while credit held more in the 10/24 region.

HY underperformed IG and saw its curve flatten significantly at the front-end - significantly negative as both underperformed intrinsics. IG (now 12bps wider from Friday's close) has seen intrinsics underperforming - especially financials and high beta - as we suspect managers are looking to simply derisk the more worrisome credits than overlay any more broad (and basis ridden) index hedge for now.

For some context, financials were horrible in credit and equities today. MS +41bps and -7.6%, GS +18bps and -5.5%, and BAC +20bps and -5.6% as secondary bonds saw considerable net selling in Barclays, SocGen, BofA, and major US insurers. We wonder if the long-suggested underweight US Insurer credit, overweight IG credit trade is being dusted off once again as a low cost long vol trade with decent beta to HY underperformance. HY and HYG stayed very much in sync today - suggesting little technical fund flow - though secondary HY bond trading was more active than we expected. Is the hot potato being passed on to retail?

Another huge day in the TSY complex saw the 30Y rally around 15bps (back under 3%), 10Y drop back under 2% and major flattening continue as 2s10s30s collapses further. Almost the entire sell-off of October has now been retraced - especially in shorter-dated maturities.

FX markets were dominated by EUR's referendum-on / referendum-off volatility as the dollar maintained its strength which was ignored by Gold which managed to rally while commodities and silver generally lost ground today. Implied Vol and correlation spiked as macro protection was bid in equity markets but notably, secondary bonds and CDS saw major regions of net-selling as opposed to blanket protection demand - suggesting credit has reached its limit on second-guessing and is derisking at the individual level (as opposed to macro hedging).

Charts: Bloomberg


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