Zee Price Stabeeleetee: From Bear Market To +20% In Under A Month

Remember the bear market? The 20% drop from the July highs to August and most recently October 4th lows has seen a major retrace in the last 3 weeks as we managed to gain 20.7% from the 10/4 lows to the highs of today. Risk was definitely on today though it felt much more like capitulation - especially in credit - than new longs being laid out. Everything was bid so an end of day comment is somewhat redundant but we would note that HYG underperformed HY and equities (hedges being laid out again?), quality IG new issues were active (but not HY), and commodities tore higher. TSY yields smashed higher (especially post a weak auction) with everyone's favorite carry trade (2s10s30s) jumping once again. The EUR dominated FX markets with FX carry driving ES to a huge day but interestingly (for once), despite the huge up day in stocks, HY and IG credit outperformed - narrowing that gap. IG was the best performer (beta adjusted) overall - dramatically outperforming with a 14bps compression (over 5bps rich to fair-value).

Its perhaps worth remembering what occurred the last time we were told that all is well and civilization can go back to donut-stuffing and iPad-buying. March 2008, when Bear Stearns was rescued, set up very similarly and peaked just above that 200DMA before beginning the reality-soaked free-fall that we all remember so well. Its perhaps of note that this period fits with our earlier chart of EPS rolling over.


Into the close, as one would perhaps expect, we saw some covering and retracement in every risk asset and a modest buying pressure in TSYs - even though silver and gold remained near their highs. HYG closed near its low of the day - having sold off right from its gap higher open. There was only modest net buying in HY corporate bonds and no new issuance while IG saw significant issuance which likely impacted the significant net selling we saw in investment grade bonds. Given the relative cheapness of IG and HY credit to stocks, the index moves make sense but the major net-selling in investment grade bonds (especially financials) while tempered by switches thanks to new issues, was very interesting and makes us wonder if buy-siders managed to bring out their dead and sell into strength for month-end on this exuberant day.

Morgan Stanley, which managed an incredible equity rally today was very timely with a sneaky $2.5bn upsized 10Y deal today at T+335 (which came modestly cheap to current CDS) and probably helped it top the most net sold list in secondary bonds are managers switched.


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