by Tyler Durden
At the end of a dramatic week such as this, when clearly the hope of a
civilized world of buy-the-dip monetary policy-to-the-rescue 'investors' was
somewhat dashed, we take a look at the decimation. Friday appeared a day of rest
for everyone but margin clerks as 'safety' was sold but nothing appeared to be
bought. Financials managed to hold their heads above water as hope remained that
someone would do something this weekend but as we scan the asset classes - we
note that investment grade credit was the best performer of the day - hardly a
signal of strength - as volumes in equity markets dropped significantly.
UPDATE 1: The fact that the CME
hiked margins after-hours seems to be as much a driver of the
weakness in gold, silver, and copper and we note that after the equity close, we
are seeing both silver and gold up around 1%. They also hiked
30Y which helps explain the coordinated sell-off we
discussed earlier.
UPDATE 2: Here they come - Trichet: We Stand Ready to Supply
Unlimited Liquidity (well that should help the USD?)
IG credit outperformed on the day as can be seen in the
chart, followed by HY, and then a close-to-close marginally unchanged equity
market. While all were well off their lows of the day/night, the moves in IG and
HY were more driven by the macro-to-micro hedge rotation we discussed (as well
as some light re-risking in quality investment grade (which saw decent
net-buying today). Over the course of the week, there was a very obvious shift
up-in-quality and up-in-capital-structure and while bond volumes in HY were
nothing to write home about (we have talked about this dearth for a long time
with the view that managers know to start to sell into this cash market is
likely to start a rather nasty ball rolling down-hill rather quickly), we did
see very modest net-buying relative to significant net-buying in IG bonds. The
greatest net-buying was focused in the 3-7Y maturities with the twist helping as
longer-dated corporates were net bought more than shorter-dated.
On the week, investment grade credit widened significantly with a
long-run-based two standard deviation shift that is the largest since May of
last year (and before that March of 2009). HY also widened notably on the week
but had been moving before the week began so its relative shift was not as
impressive. We do note that equities remain significantly expensive
relative to credit still even though we have collapsed the relative-value
significantly this week.
All stock sectors ended the week lower. Even dividend-heavy
safety plays such as Utilities were unable to hold gains (though they were the
clear winners losing only 1.7% on the week). Materials and Energy were the worst
hit (which might surprise some given the constant chatter about Financials)
which might help explain the dramatic drops in emerging market and
commodity-producing nation stocks, credits, and sovereign spreads this
week.
In terms of magnitude of move, TSYs were the initial choice
as winner (though see further down for the Silver move!!) with the shifts
post-Bernanke both shocking (given how telegraphed the 'twist' was) and violent.
Making new records all over the place, 30Y (long duration) bond yields were
smashed lower.
It is interesting though that not only did we see a relatively significant
(for a normal day) sell-off in TSYs today, but 5Y shifted lower (yields
higher) than pre-Bernanke and even the pivot 7Y started inching back
towards unch. It was perhaps evident from our earlier discussion with regard TSYs
and precious metals that today was more a liquidation of whatever you had
left for some funds (or selling of the winners because noone likes selling
losers eh DeltaOne).
Precious Metals, more specifically Silver, were the hashtag
trending topic of the day. It seems when looking at stocks and sectors (and
credit) that whatever caused this sell-off had the definite feel of forced
liquidation/workout post a significant margin-call from the previous days. The
moves in stocks/other-risk-assets today were simply not large enough to trigger
such obviously forced selling and the stabilization - albeit at massively lower
levels into the last hour or so suggests this was the case also.
The move this month in Silver is over three standard deviations from very
long-run norms and is the largest since March 1980 on a percentage basis
(on an absolute basis this month's sell-off is over 10 standard
deviations from the norm!).
Of course, the losses in commodities and precious metals were not helped by
the strength of the USD this week - which gained over 2% but can hardly be
blamed (not even on a levered basis) for this pain. FX markets
were very volatile but followed the similar chaos-pause pattern we see
in the equity market with most of today/late-yesterday relatively stable (we say
relatively because on a normal day a +/-0.5% shift in DXY is news).
All-in-all an incredible week that seemed to catch many
unhedged and off-guard as we discussed was possible given options and credit
skews implications. The market remain comfortable at this pivot point but we
suspect that if we do not get any real action this weekend then Round II
will start Sunday evening as it becomes increasingly evident that
global growth is grinding to a halt and credit crises are once again spreading
(having gummed up all monetary transmission channels).
UPDATE: The fact that the CME hiked margins after-hours
seems to be as much a driver of the weakness in gold, silver, and copper and we
note that after the equity close, we are seeing both silver and gold up around
1%.
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