Volume Only Underperformer As Euphoria Catches On

The slippery slope of lower volume continued today in the NYSE (cash/stock trading markets) despite ES (the e-mini S&P futures market) seeing its 2nd highest volume since 12/16 as that futures market has only seen 1 day of the last 11 with a negative close-to-close change. Driven seemingly by yet another rumor that the Greek PSI deal is close (yet GGBs are lower?), risk assets broadly went into overdrive and while ES held 1300 (on very large average trade size and volume as broke that stop-heavy level), the shifts in commodities, FX, and Treasuiries all helped sustain the euphoria into the close where we stabilized at yesterday's pre-market highs. Copper, Silver, Gold, EURUSD (and all FX majors aside from JPY), Treasury yields (and 2s10s30s) all closed at their highs of the day and while oil dropped early (around the Keytsone news?) it also limped back higher to $101 by the close. Equity markets were slight leaders on the day but credit caught up into the close. We do note that while the high-yield credit index has rallied dramatically but worry that the optical compression of spreads (bullish) is hiding the bear flattener in 3s5s that is seemingly dominating flow for now (relative to underlying credit).

NYSE volumes have trended down since the USA downgrade - today was average for the weakness of the year to date (even as euphoric behavior was evident everywhere).

As far as ES volume, it was solid right at its 50DMA but under the surface there was a huge surge in average trade size around the break of 1300 as well as into the close - these peaks have been increasing recently as have tended to occur at broader turning points (exhaustion buying is the term that comes to mind). What should also be notable from the chart above is the proximity of the crossover between the 50DMA and 200DMA (blue and purple lines above) which have the feel of a trap given these spikes in average trade size but standing in front of that crossover may be hard (smaller unit size maybe?).

Equities (blue) lead credit (light/dark red) most of the day but into the close ES stabilized as credit pushed on to new multi-month highs (low spreads). HYG maintained its composure with ES as a late day surge helped it not underperform.

The rally in HY credit 5-year risk is impressive (green) and we note that it is now very rich to its intrinsic (or fair-value). The lower pane shows that since very early January when the skews (the difference between the index and the value that the underlying names in the index would suggest is correct) compressed to zero (black dotted oval) - after blowing out as managers reached for index protection en masse into the holidays rather than sell into an illiquid market. Since then we have seen 5Y spreads compress (and stay in sync with - or even support - equity's performance), while 3Y (purple lines) has underperformed (becoming 'cheap' or wide relative to its fair value). The point is that this flow (which is seemingly much more index-driven given the shifts relative to fair-values) is a 3s5s flattener - a position that is quite frankly much more bearish-biased. While optically 5Y has been compressing, the front-end of the credit curve has become more concerned with risk.

Financials went from biggest loser to almost winner today as GS results (and a belief in the IIF's 99th press release) sent them from -0.6% to +1.53% by the close helped by the majors all ripping, especially MS and GS (though BAC did not let the side down). Interestingly Energy outperformed on the day despite oil being well off overnight highs.Utilities were the only underperforming sector of the day managing a marginal -0.03% close to close.

Broadly speaking, the ES rally was well supported by risk assets (as medium-term CONTEXT above and short-term here indicates) and correlation held up rather well into the close. It is evident though that ES is a little  rich to CONTEXT overall but there is no specific driver that stands out as a factor to watch for give-back (except perhaps AUDJPY or 10Y TSY).

Away from all that excitement EURUSD rallied up to over 1.2850 (near its highs of 1/13) though we note that JPY is still underperforming (only major down against the USD this week). AUD strength continues to help fund carry which makes us smirk a little as the huge compression in AUS bond yields (and rise in AUD) seem much more about safe-haven flows seeking AAA refuge and yet the AUD rally is implicitly helping to drive (via carry correlations) the rise in risk assets overall.

Commodities rallied as the USD sold off with Copper now up 3.5% YTD and Gold and Silver inching towards the highs of the week once again as the former held above $1660 into the close. Oil surged back from earlier lows as risk took off and as we write is over $101 once again.

Treasuries did what they are supposed to and sold off as stocks rallied. 2s10s30s rallied and the curve steepened with 30Y now 4.5bps higher on the week (7bps off this morning's low yields).

Charts: Bloomberg


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