What A Day

From Peter Tchir of TF Market Advisors

Stocks and credit were up nicely overnight.  Stocks in particular were heavy once Europe opened.  Markets stabilized a bit after the unemployment claims number (who still has jobs that allow them to get benefits when they get laid off?).  It was the ECB press conference that really set the tone.  MAIN, which was the only CDX index in Europe with any semblance of liquidity leaked a little during the call drifting from 127 to 129.75.  Then came the magic words.  ECB bond purchases.  MAIN immediately gapped to 125.75.  As it started leaking, unable to hold the gains, and then actually moved back to the wides, that seemed like a clear sell signal.  We had the news that we were looking for, albeit somewhat watered down, and the market couldn't rally on that. 

That was a very disturbing event in my opinion. 

The U.S. remains hopeful that QE3 is coming.  The tone of messages I get seems to be of people caught long (possibly recently) trying to show that market isn't really that weak.  We tried the "Europe has gone home rally" and it pushed SPX cash all the way up to 1229, but since then we have faded.  I think people will get more and more nervous about NFP as we head into the close.  It is not just the number tomorrow that people are worrying about, but possibly massive downward revisions.  Is it possible we get a 10% unemployment rate print tomorrow?  Probably not, but given the price action, the fact that too many people still seem to be hoping for QE3 (I was one of those overnight and early today), and the NFP revisions fear, I think we will see a new low today before we close.

HYG and high yield market has taken it on the chin today.  But HYG still seems more priced to the offer side. I'm tempted to cover that short, but the shares outstanding are still at near term peaks.  We are getting this sell off in high yield with minimal outflows.  I think it has another leg down as these losses cause some investors to sell out of the asset class and we see an outflow led sell-off.  Also the CDS indices aren't trading particularly cheap.  After such big moves, I would expect to see IG trading 3-4 bps cheap and it is basically flat.  HY is probably just over a point cheap, but in a market moving by 2% that is probably hard to capture and isn't as extreme as it often gets.  It tells me that credit investors haven't believed in the sell-off are overexposed and/or underhedged.