Europe closed uneventfully with equities mildly outperforming credit (diverging for much of the day) as sovereign spreads were mixed with BTPs higher in yield (and spread), Belgium lower in yield/spread, and Spain unch. Volumes were obviously very light and bond markets went dead in the afternoon - especially gappy post BTP's break of 7% as bid-offer spreads cracked wider. Interestingly, cable (GBPUSD) slid relatively significantly into the close (GBP weaker, USD stronger) - losing around 100 pips from its earlier highs to close at pre-LTRO levels extending losses from the earlier weak data print. US markets have traded quietly all morning with most risk assets in line (credit and equities in sync) but TSYs are completely divergent on the day (from the start of the US day session). Stocks managed to pull back to CONTEXT but amid low volumes they are oscillating around VWAP and jumping a few pts on any flow. Credit looks to be simply reracked on ES moves - as we hear very little actual flow. Much is being made of the drop in VIX today but we suspect this is much more simply explained by vol steepeners across the holiday period - a very seasonal pattern that benefits from normally lower realized vols across the year-end - perhaps Greece's bond maturities next week will upset that plan this year?
European sub financials (light blue) underperformed all day. The rest of credit complex leaked wider from their gappy tight open. Equities (dark blue) and credit diverged from the middle of the European day.
Cable has stalled out from its earlier macro print weakness - losing almost 100pips on the day and holding at the gap higher levels from pre-LTRO.
TSYs are totally diverging from Equities and the USD today so far. Admittedly there is little flow away from stocks (and low volumes there also) but broadly speaking credit is in line with stocks and risk assets in general are lower but leaking very gently higher.
ES (the e-mini S&P 500 futures contract) has pulled back intraday to a more supportive braod risk asset level (CONTEXT) but a look in the lower right hand quadrant shows that the correlation between risk assets broadly and the equity market are dropping rapidly intraday (as is anecdotally evident from the TSY vs ES vs DXY chart above). In general risk ETFs (upper left quadrant) are tracking each other well for now with HYG behaving for once (this is comparing SPY with HYG-VXX-TLT).
Much is being made - as always - of the at-best contemporaneous risk index VIX drop today (and note from the chart above this one that we see VIX as notably below expectations given empirical relationships to HY credit markets - lower left quadrant). One look at the seasonals for the short-end term structure of Vol (above in light blue dotted line for average over last ten years) shows a very clear pattern of vol curve steepening into the year-end. Actually the steepening tends to be to the Christmas holiday and then flattens/decompresses into the new year. This year's steepening (selling very short-dated Vol and buying slightly further out Vol) is more notable than average but is also reacting from a much more significant flattening mid-year.