The S&P 500 closed practically unchanged today - recovering from decent selloff to a late-Europe-session low - amid volume that was over 30% lower than at the same time last year. Investment grade credit, the high-yield bond ETF HYG, and broad risk assets in general kept pace with ES (the e-mini S&P 500 futures contract) but high yield credit (tracked by the HY17 credit derivative index) outperformed considerably - moving to its best levels since late October. This disconnect appeared as much driven by technicals from HY-XOver (Long US credit vs Short EU credit) and HYG vs HY17 (a high premium-to-NAV bond ETF vs relatively cheap high yield spread index) trades as it was a pure risk-on trade. Elsewhere, the USD retraced only marginally the earlier gains of the day (with EUR hanging under 1.2950 by the close) as Treasury yields jumped 5-7bps more (30Y +14bps on the week now) as we can't help but notice the correlation between TSY weakness and EUR strength for a few hours this afternoon (repatriation to pay up for tomorrow's French auction?). Commodities were very mixed with Copper sliding notably (decoupling from its new friend Gold which rose and stabilized this afternoon over $1610) as Oil pushed higher all day (over $103) on Iran news and Silver leaked back this afternoon (under $29.5).
US equity volumes remain very low - not bouncing back at all like last year's! We also note that ES (e-mini S&P 500 futures volume) is 35% below its medium-term average. There were two periods of activity (where notably larger than average trade size occurred), the first was heading into the European close as we bounced off last week's highs, and the other occurred into the close as it appeared larger traders were covering longs.
Much like yesterday, ES, investment grade credit, and HYG all tracked each other rather well but the major disconnect was HY17 (the high yield credit spread credit derivative index). Breaking above $94 takes HY17 back to late October 2011 levels - near its best levels since inception in September. As we noted above there are some technical (flow) reasons for this related to popular trades that are perhaps having a more significant impact on HY17 price movement - these are the 'US high yield will outperform European high yield bonds as Europe's supply concerns are massively crowded out by sovereign issuance and deleveraging' which means being Long HY and Short XOver (Europe's high yield credit index). This trade was perhaps laid out today as the close of Europe saw HY17 take off.
The other trade that has become more obvious as increasing numbers of funds trade HYG - that is the compression trade as HYG has outperformed dramatically (and trades at a considerable premium to NAV).
Nonetheless - for months we have been pointing to the considerable underperformance of high yield credit as an indication that the equity market is over-enthusiastic. We worry that today's surge was a little too scrambling and given its focus in credit derivative land (and total disconnect from other realities) we suspect it is not the all-clear that some will think it is.
Copper is now underperforming the USD and is lower for the year as Oil and Silver resync coincidentally at around a 4.75% rise for the year. Gold was stable for much of the post European day at around $1610-15 - up around 2.9% on the week.
Broad risk-driver assets stayed well correlated today, as the lower chart shows, and in general ES and CONTEXT (the broad risk asset proxy) stayed in sync for much of the day - despite some overnight derisking efforts (mainly due to TSY 2s10s30s decompression).
Charts: Bloomberg and Capital Context