by Tyler Durden
While there was no news from the Greek-Troika discussions, 'deal' chatter was
enough to juice S&P futures to day/night session highs (above 1200) on a
significant rise in volume. All day we had 5-10pts swings in ES hinging on every
headline from Europe and it was very clear that underlying equities themselves
were being dragged in a very macro-manner (no surprise at the intraday
correlation) with financials lagging most of the moves and ending down 2.7%.
The rally in stocks in the last hour was mirrored in EUR strength but
not as much in credit markets (IG and HY spreads were far less
excited). Notably front-end spreads underperformed - curves flattened
in HY as single-names and indices did converge as we head into the roll
tomorrow. IG still seems quite rich and HY modestly cheap to their
respective fair-values - suggesting the market positioning is more biased to
macro decompression and a flight-to-safety.
TSYs gave back some gains as ES rallied but were unable to get close to the
same 'high' levels of the day ES managed. More critically, 2s10s30s, which had
fallen all day, hardly budged as stocks rallied. ES average trade size picked up
also as we reached 1200 suggesting (once again) that the professionals were
selling into this strength.
So once again we see stocks acting on their own cognitive dissonance while
general risk assets were far less impressed with the chatter. As the close
approached, ES fell back from its greater-than-two-standard-deviation-above-VWAP
level, converging back towards credit and TSY curve expectations.
It appeared a significantly algo-driven day (once again) in equity indices
with VWAP playing a very significant role post European close.
Gold outperformed relative to the other PMs/commodities from Friday's close
but still lost almost 2%. Copper -3.6% and Oil/Silver around -2.4% as the dollar
gained 0.7% on the day. The EUR recovered half of its losses by the close ending
at 1.368 (-0.8%) while JPY was the winner, strengthening 0.27% vs the USD on the
day as carry trades were modestly unwound.
It seems to us that the Europeans are waiting on Bernanke by delaying this
decision. Time is running out for the Greeks on their interest payments. We
assume Bernanke knows he is being 'gamed' to some extent here and we also found
it fascinating that Geithner chose to comment specifically that "U.S. in Good
Position to Handle ‘Shocks’ From Europe" suggesting we should not panic if we
see something scary from across the pond. Given the lack of movement in
2s10s30s, which remains our preferred measure of the market's expectation of a
'Twist' style solution from Bernanke, it would appear that the bond market is
becoming less confident that it will occur. Perhaps this is a reflection of
Bernanke calling the European's bluff with no global stick-save tomorrow? or
perhaps it is simply business-as-usual and we will ease our way into
oblivion.
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