So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €5 billion in 1 year Bills into what may well be a bidless market.
Unable to scramble back to VWAP, the buy-the-dippers faced
some uncomfortable reality today in equities as we closed near the lows of the day in ES (on heavy volume). Financials dropped over 5.5% with some of the majors (MS, GS, BAC) and Minors (JEF) stumbling very hard. The biggest drop in financials in over two months (and ES also!) was the worst performing sector as equity markets retraced more of that richness relative to credit that has been hanging over this rally's head. Wherever you looked there was pain with Copper smashed lower (along with silver and less so Gold) as the dollar tore higher after EURUSD fell over 330pips from its morning highs.
ES managed a small pull off the lows into the close but remained well south of both VWAP (light blue) and CONTEXT (dark blue) as volume was 30% above average by the close.
A one-day drop in the Financials ETF of over 5.5% is the most since the early August chaos.
And as usual, this is what happens when too much faith in central planning meets reality:
But it will get worse: unless the ECB steps in early and forcefully tomorrow, this is coming:
Away from stocks, credit was even more aggressively sold off (just as we saw in Europe this morning) with HY crushed - which will implicitly drag our expectations of equity market's relative-value down also.
We have been very vocal at the pump-and-dump we suspect has been going on in the HYG ETF and its underlying HY cash market and today sawHYG dramatically underperform at the close. It seems perhaps (once again) that the liquidity hedge prefernce shifted back to HYG (the high yield bond ETF) after HY17 (the suppoosedly liquid credit derivative index) dried up.
And then HYG also cracked lower into the close relative to SPY...
While taking advantage of this disconnection may seem simple, we suspect that HYG was simply the easiest place to set out hedges as we accelerated weaker into the close and every other market dried up. We discussed this at length last week and especially note that we were growing worried about the exuberance in the HYG and the HY bond advance/decline line.
The 'save' in Oil early on (around the report and the EU close) along with the weak auction in 10Y TSYs probabaly supported ES more than otherwise as broad risk assets did not drop quite as dramatically. TSYs closed well off the low yields of the day but were still down for the day quite handily. VIXblew back out as did implied correlation as macro overlays were grabbed at whatever cost for liquidity. Gold remains up 0.8% on the week but gave back some today with Silver just negative on the week now. The
dollar strength and equity weakness combined to drag us back to -3% YTD
in terms of constant USD purchasing power (and -2.27% outright in the
S&P).
dollar strength and equity weakness combined to drag us back to -3% YTD
in terms of constant USD purchasing power (and -2.27% outright in the
S&P).
Charts: Bloomberg
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