From Capital Context
The correlation between stocks and the USD remains high with gappy injections of liquidity helping the S&P create higher beta.
Stocks fluctuated transitorily ending the day higher, though off their highs, handily outperforming the HY and IG credit markets as the FX and PM markets exploded in the afternoon around Bernanke's press conference. The S&P is now up around 2% YTD in trade-weighted USD terms, having risen a spectacular 1% since early yesterday morning in the face of a veritable meltdown in the USD (as TWI lost 0.77% from pre-FOMC this morning).
We discussed the trend in equity outperformance in this morning's Midday Movers , but what is worth noting is that the USD-numeraire-based US equity market has been somewhat in a world of its own the last few days to a week or so. Arguing that today's equity market rally was due to anything fundamental (energy sector strength or earnings) is simply disingenuous. When we look at sector performance, it was uniform from the beginning of Bernanke's speech and we simply point to the incredible tick-for-tick correlation between the USD and the S&P as opposed to credit spreads which are for all intent and purpose numeraire-less.
Of course spreads will compress thanks to inter-index relationships, vol rolling down the moneyness curve as stocks rally, and the potential improvement in 'distance-to-default' that will be evident in any hybrid structural model when equity (and supposedly implicitly asset prices) rise but we note that the impact has been far less than any relationship (empirical or structural) would expect over the past week.
S&P Sector performance from start of Bernanke press conference shows very little differentiation as USD weakness ruled.
Why do we whine on about this - well, it is all too easy to see stock market indices rise day after day and assume that all is well in the world. Certainly these transitory fluctuations appear to most watchers as inevitable and the Fed is 'Winning'.
But if we step back and consider, credit markets lack of ebulience, the mixed nature of the secondary bond market recently (with concessions dropping, issuance lagging, and net selling occurring more often from buy-siders), single-name and index spread curve flattening, an up-in-quality theme that is clearly differentiating from the systemic beta trade we have been on, and vol skews and term structures that beggar belief in their steepness, one has to wonder how so many long-only managers look themselves in the make-up mirror before they set foot on TV nowadays. None of this is new to readers obviously but if ever there was a day when the purchasing power driver of US asset prices was evident, it was today, and in fact this afternoon more than any others. RANT OVER.
IG Credit ended at its tightest close since mid March, back under 92bps (and tightest for IG16) while HY only managed to get back to its tightest close since 4/8 (though notably it was around these levsl in Mid-March also - pre-roll). For context, the S&P was 57pts lower and VIX 5pts higher the last time IG credit was at these tights!! (and HY-IG is the same at around 340bps). Model-wise, we would have expected HY spreads to be 50-70bps tighter than at current levels given the shifts in equity market caps and vol - but clearly there is more going on - whether you believe lower growth, a releveraging cycle, or a combination of both is priced into credit (as opposed to stocks), is up to you to decide. Our experience tends to show that credit warns and equity confirms and especially at turning points in the credit cycle, this is far more accurate than expecting analyst earnings expectations or economist growth expectations to adjust first.
VIX came tumbling off highs at 16.4% as stocks surged to close lower on the day as S&P skews dropped very modestly. Implied correlation opened to a crescendo back above 63% but slid as the day wore on - in line with VIX. A slight bid into the close was evident (as index protection was more desired than single-name protection) but we note that over 70% of our single-name universe saw increases in vol today.
Contextually , this is out of line with the 25% wideners in credit and 23% losers in stock land, but it has been a recent theme as low beta names have seen protection bid in equity options (relative to high beta). Today was no different with low beta stocks outperforming high beta (in our universe) and low beta CDS compressing modestly relative to a very slight decompression on average among high beta credits. We have discussed this with the view that higher beta names are being derisked (aside from AMZN, NFLX etc?toungue in cheek) while the up-in-quality trade in credit is reflected in equity markets via a lack of selling of these positions but an option overlay at these heady heights.
All sectors saw positive equity performance on average today while Energy disappointed on average in credit.
At the sector level, Healthcare, Utes, and Consumer Non-Cyclicals saw the best equity performance relative to credit on average (on a beta model adjusted basis) while Basic Materials, Tech, and Consumer Cyclicals underperformed in equity the most relative to our beta model expectations from credit. Across the credit quality spectrum, it was hugely evident that recent trends persisted today though if we squinted we could see credit outperforming in the A to BBB region relative to other cohorts.
It is worth pointing out that once again we saw net selling in secondary financial bonds, and financial CDS underperformed equities today on a beta-adjusted basis once again (and their front-end curves flatttened modestly in many cases). At the single-name level the biggest divergences from our empirical-structural framework were for SWK, PX, KMP, CSCO, and HRB from the perspective of credit outperforming expectations from equity and vol. at the other end with credit underperforming expectations from equity and vol, we see UHS, CTL, NLC, NXY, and BXP today.
The main trend from our contextual model today was one of higher quality names seeing equity relatively outperform credit and lower quality names equity relatively underperforming in the capital structure - perhaps this is the re-leveraging wealth transfer we have been considering.
Europe
We discussed the macro data this morning but most notably it was more weakness in GGBs (Greek bonds) while CDS remained quite quiet. Some chatter on potential restructuring events not triggering CDS re-emerged (it comes and goes) and perhaps is why GGBs blew so much wider still as whatever bondholders are left (that arent the ECB) will only be holding these things based against the CDS and that may explain the CDS outperformance and bond underperformance of the last few days (i.e. Cash-CDS basis buyers or hedged owners are unwinding) as we note that the basis for Greek 5Y has dropped almost 200bps this week alone (after getting back to within 40bps of zero on Monday. Along those lines the PORTUG basis remains very wide while Spain not so much - perhap to the detriment of Spain's auction capabilities as these basis players soak up some of that issuance (be careful what you try to do Mr. Restructuring chappy).
The compression in SovX (notably more than intrinsics) may be a technical remnant from the break we have seen between financial and non-financial spreads but as much as anything else, the rapid ascent of the EUR (and potentially the fact that Greece has hit a floor - bonds trading at 50ish!!) could be helping sovereign risk though (which remember is denominated in USD at the single-name level). Senior Financials compressed a little today, very slightly outperforming non-financials but we note that the relative richness of Main to intrinsics and cheapness of XOver to intrinsics suggests a very one-sided decompression perspective OR we need to see hedges unwound into single-name selling and/or an all clear - this is a different piucture than in the US - especially noteworthy given Main's exposure to financials. As an FYI - we are sniffing around a HiVOL vs Senior FINs trade again here - more to come on this.
In Main, the biggest percentage movers were Henkel KGaA (+2.72%), TeliaSonera AB (+2.03%), and Wolters Kluwer NV (+1.82%) in the underperformers, and Volkswagen AG (-3.51%), Volvo AB (-3.37%), and Bayerische Motoren Werke AG (-3.27%) in the outperformers.
Asia
Japan's downgrade had little to no impact on the asian credit markets with JGBs not budging much and Japan CDS widening less than 1bp. AXJ widened 1bp, underperforming Japan corps by 2bps on the day as the spread between the two continues to slide - in favor of the trade recommendation we made over a week ago (given Japan's sovereign compression).
Asian sovereigns in general were very mildly tighter as ITRX Aussie corp risk rose less than 1bps but back to 1 week wides - though the banks outperformed (not in favor of our decompression trade). Our Aussie Index fell -0.11bps (or -0.12%) to 95.26bps. Crown Limited (3.61bps) is the worst (absolute and relative) performer. CSR Limited (-2.17bps) is the best (absolute and relative) performer.
Among our Asian single-name credits (which fell -0.04bps (or -0.04%) to 101.45bps on average), Cathay Financial Holding Co Ltd (10bps) is the worst (absolute and relative) performer. Kobe Steel Ltd (-6.02bps) is the best (absolute and relative) performer.
Index/Intrinsics Changes
CDX16 IG -1.13bps to 91.5 ($0.04 to $100.32) (FV -0.51bps to 89.59) (25 wider - 74 tighter <> 68 steeper - 51 flatter) - No Trend.
CDX16 HVOL +1bps to 152 (FV -0.86bps to 147.79) (5 wider - 20 tighter <> 16 steeper - 14 flatter) - No Trend.
CDX16 ExHVOL -1.8bps to 72.39 (FV -0.41bps to 71.92) (20 wider - 76 tighter <> 43 steeper - 53 flatter).
CDX16 HY (30% recovery) Px $+0.12 to $102.81 / -2.9bps to 431.1 (FV -2.05bps to 417) (28 wider - 56 tighter <> 45 steeper - 49 flatter) - No Trend.
LCDX15 (70% recovery) Px $+1 to $101.375 / -25.37bps to 227.69 - Trend Wider.
MCDX15 +0.5bps to 139bps. - Trend Tighter.
ITRX15 Main -1.25bps to 98bps (FV-0.7bps to 101.19bps).
ITRX15 HiVol -1.5bps to 137bps (FV-1.36bps to 135.04bps).
ITRX15 Xover -3.5bps to 361.5bps (FV-5.04bps to 350.58bps).
ITRX15 FINLs -1.37bps to 134.38bps (FV-0.99bps to 136.73bps).
DXY weakened 0.74% to 73.29.
Oil rose $1.08 to $113.29.
Gold rose $22.7 to $1529.
VIX fell 0.27pts to 15.21%.
10Y US Treasury yields rose 4.5bps to 3.35%.
S&P500 Futures gained 0.76% to 1351.1.
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 0.5bps tight (rich) to its 50d moving average, which is a Z-Score of -0.2s.d.. At 91.5bps, IG has closed tighter on 63 days in the last 597 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 17.7bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d. and at 431.11bps, HY has closed tighter on only 37 days in the last 597 trading days (JAN09). Indices generally outperformed intrinsics with skews mostly narrower.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 3.8bps. Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 10.7bps, and stocks outperformed IG by an equivalent 1.8bps - (implying IG outperformed HY (on an equity-adjusted basis)).
Among the IG16 names in the US , the worst performing names (on a DV01-adjusted basis) were CenturyTel, Inc. (+10.5bps) [+0.08bps], FirstEnergy Corp (+6.5bps) [+0.05bps], and SLM Corp (+4.5bps) [+0.03bps], and the best performing names were GATX Corporation (-5bps) [-0.04bps], MDC Holdings Inc (-5bps) [-0.04bps], and Arrow Electronics Inc. (-4.5bps) [-0.04bps] // (absolute spread chg) [HY index impact].
Among the HY16 names in the US , the worst performing names (on a DV01-adjusted basis) were McClatchy Co./The (+41.68bps) [+0.35bps], MBIA Insurance Corporation (+37.57bps) [+0.26bps], and Qwest Capital Funding Inc (+14bps) [+0.16bps], and the best performing names were Dynegy Holdings Inc. (-44.54bps) [-0.37bps], Eastman Kodak Co. (-37bps) [-0.29bps], and Radian Group Inc (-29.56bps) [-0.27bps] // (absolute spread chg) [HY index impact].