Credit continues the sharp move higher. iTraxx simply refuses coming down. Note it hardly moved lower, despite the G20 initial “success”. It looks as investors are scrambling for protection in an almost panic way here. We have not seen European credit trade this badly in a long time.
As we have been pointing out for months, credit has been a big driver and a “quick” risk indicator for equities over past turns. Divergences have occurred, but equities have eventually caught up to the credit direction.
Below is “our” chart we keep updating over and over. Orange is the Eurostoxx 50 futures (VG1) versus iTraxx (white and inverted). The gap between credit and equities remains, and is totally inverted to what we saw in early November.
Also, worth noting is the fact equities have resumed to trade in tandem with credit lately, opposed to late November when credit deteriorated and equities were trading more upbeat.
Below chart shows Credit (white) versus Eurostoxx 50 volatility, V2X index (orange). The gap between the two continues, and note how V2X is actually lower compared to mid-November levels, while credit continues the trajectory higher. Eventually this will offer an interesting macro pairs trade, but we are still observing only.
Our take has been that the equity markets need a consolidation in order for investors to sober up post all the violent moves we have seen, both down and up. The bounces have actually been more violent than the sell offs, if you look at how many days they have lasted. Eurostoxx 50 remains in the 3100/3250 range.
Trading ranges is a special skill, as you have to go against the news flow and believe in the mean reversion to continue playing out. As momentum chasers try pushing markets to break out, both ways, the range actually remains intact.
We saw the VIX pop higher by 26% yesterday. More importantly though, is the VIX curve. After a few days trading in negative territory, the 1 vs 6-month VIX futures, once again entered positive territory, which continues to be a “stressed” level.
Let’s see how this week continues, but expect the crowd to be frustrated as moves are continuing to be crazy and erratic.
Source: charts by Bloomberg