Friday, November 25, 2011
Stocks plunged at the close for the third day in a row to cap the worst Thanksgiving week ever. US equities seemed in a world of their own for much of the day – especially financials – as all the hope and rumors faded and clearly a large number wanted to be flat or short into the weekend. Across a broad basket of risk assets (CONTEXT), today’s equity rally and selloff was pure emotional overshoot and correction as we closed back at reality. HYG once again led the derisking way and credit underperformed equity until the late-day equity sell-off converged them once again. What has been most notable this week – particularly the last day or so, has been the sell-off in Treasuries. The concerns that European entities are repatriating anything and everything should be very worrisome and the volume into the ES close suggests that fear is growing.
CONTEXT was less ebullient though was bid today as broad risk assets moved up on hope and then rolled over on reality once again. The factors were much less correlated than normal – especially treasuries – but the incredible correction back to sanity into the close was quite surprising nevertheless in its relative exactness. We think the lower correlation is also a factor of technical flows and worry that we are heading towards some break that could lead to significant outflows from seemingly low risk trades – something to watch.
Treasury performance today was entirely odd given the sell-off of the afternoon and the relative strength until the last day downgrade of Belgium in EURUSD also suggests that there was heavy repatriation of foreign assets.
Equity and Credit were generally in sync today but HYG led the way once again. The 4th day in a row where HYG was the clear beta leader (red ovals) which fits with the thesis of ETF-stuffing that we have been effusively discussing for a few weeks. Given high-yield credit’s further deterioration, we have adjusted our S&P 500 cash index fair-value to 1135 and while we are as close to fair between equity and credit (as equity has snapped back to reality) as we have been in over a month, we suspect if sustained pressure from HYG pushes into secondary HY bonds, credit and equity will repeat the pattern on 2008 and tumble together as if riding an illiquid slip’n'slide.
Its admittedly thin trading after-hours but the major US financials have given up all of their gains with MS, WFC, AMEX, and GE all practically unch and GS and BofA dropping off.
FX markets were a one way street this week as EUR-based flows drove USD strength in almost a straight line – admittedly with some vol – with DXY up over 2.1% on the week and AUD down over 3% against the USD. Finally, into the close, commodities generally sold off quite hard – fully retracing the SNB/Greece ‘good-news-silliness’ chatter – with Oil and Silver the craziest. What was very notable was the last minute rally in Oil into the close – war premia? Gold modestly underperformed the USD on the week while liquidation appeared more the moves for Silver and Copper.
The week in Europe was clearly the main driver (and rightly so) and is evident in the disconnects this week in European credit and equity. Financials closed just of their wides of the week while the rally into the EU close (well before today’s ugliness in US) was led by Main (not XOver) suggesting it was much less risk-on than it might appear. Equities outperformed today – once again seemingly in a world of their own – and given the weak close in the US, we would expect this gap to fill on Sunday’s open (as we have seen again and again).
Pete Tchir, of TF Market Advisors, sums the day’s headlines in Europe up nicely:
The only logical conclusion is that we are further away from a solution or agreement in Europe than we have been in a long time. The “Grand Plan” has failed and this time, it is not a matter of creating “bigger and better” versions of prior plans, they need to do something new. Germany in particular will not relent on “printing” until a real, credible, and implementable plan is on the table. I think they are weeks away from that. In the meantime expect support for European sovereign debt to erode. Italian and Spanish debt are dangerous, but as shorts take some profit there at these yields, they will step up positions in Belgium, France, and probably Germany.
The best thing Europe could do is impose some old school “children” rules on the politicians, finance ministers, and various government employees. They should be told 1) Children are meant to be seen, not heard, and 2) If you have nothing good to say, then don’t say anything. There is enough bad news out there without people like Mersch taking the time to speak. Would it be that hard to say Draghi is only one allowed to comment on ECB at this stage? I’m bearish and thankful to Mersch, but really, what was the point of that?
Have a great weekend and enjoy the holiday, and get some rest, because this is likely to be a December to remember.
This article was posted: Friday, November 25, 2011 at 3:00 pm