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Thursday, April 2, 2009
Credit - Equity Divergence Continues
IG 12 back to virtually unchanged at 197 bps after opening 4 tighter: the credit market is not buying it. Equity market is... well... the equity market. Those who say credit markets have been wrong for the past 6 weeks may be on to something... or not
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9 comments:
Via JPM...reason for credit underperf: "CDX.IG underperformance vs equities over the past week has been significant, and due primarily to upcoming CDS market changes (and not a fundamental difference in the outlook from equity and credit markets). The index is 19bp wider on the week while the S&P is nearly flat. This is a driven by the implementation on April 8th of the new North America CDS trading conventions which will allow easier index arbitrage. CDX.IG is now 21bp tighter than its fair value while 1week ago it was 37bp tighter. Investors are buying protection in IG as they recognize it was trading too expensive previously and the index vs underlying CDS difference will be more arbitragable starting next Wednesday. E. Beinstein"
In speaking with several equity trading desks, both sell and buy side, there is virtually zero vanilla money being put to work. Most of the activity is the hedgies/prop desks moving in and out leaving little exposure overnight.
The bond desks I've spoken with say the same thing every day..."stupid stocks." The bond guys are saying that the credit markets are trading with the expectation that govt. easing will cease at some point. And when that happens, rest assured that the equity markets will catch up.
old news but correct - skews have been extremely rich for a while now (thanks as ZH has pointed out previously to CDO unwinds among other things). The skew is not as tight now as JPM comments on but i do believe that shorts have been sitting on sideline as duration benefits of the new CDS contracts are worth waiting for (for shorts)...Even allowing for that (and looking at the CDS market from the botom-up (name by name)) we see credut has significantly underperformed equity in most sectors and especially financials...
Mel, we are seeing incredible long only money buying stocks. Not sure what desks you talk to
Mel, here's the way it works in the stock market: there is a buyer and a seller. So if hedgie's and prop desks are bidding up the stocks but not holding over night- who is buying from them at higher levels at the end of the day? For what it's worth I think retail traders are driving this as much as anyone ( I think TrimTabs spoke to this) via some selling the Ultra shorts and other bying the 3x Long ETF's. But who knows- just because you are disgusted by policy and want the mkt to go down (Me) doesn't mean it does (our fund has been long for a few weeks). Never hated making money more- when can we short again?
As much as you guys are bearish, I'm seeing a lot of inflow into commodity currencies - aussie, real, even kiwi.
re: currencies
i'm guessing commodities rallying on dollar weakness vs. euro...if thats true, i just don't understand how woefully inadequate EU monetary policy is a reason for commodities to rally. mind boggling.
Forgive me if I say something that may be wrong. I am a very junior guy having only been in the game for about a year. But what I can say is that the money being put to work on the long side has come with a short leash...thats what I meant regarding the equity flows. The vanilla money being put to work has been very spotty coming with a little appetite...these guys aren't jumping on the next bull market bandwagon.
Thanks, I know how the equity market works.
The problem with a six-week analysis is that it was preceded by two months where credit significantly outperformed stocks. Looking at performance from the beginning of the year, stocks are still flat to down, whereas both investment grade and high yield are tighter.
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