US Equities Retreat In Risk-Averse Trading
US equities retreated in a less-than-stellar start to the week, as the performance was broadly risk-averse. All three major indices closed lower in a defensive tape, with only REITS eking out small gains and small caps underperforming. Lack of catalysts weighed on conviction, with volumes for every subsector trading below their 20-day moving average. Performance almost coincided with the market cap from top to bottom on Monday.
There's not much on the horizon outside of earnings—16% of SPX report earnings this week—with a very light economic release calendar before Thursday’s employment claims and home sales. Simultaneously, no Fed members are scheduled to speak, given the quiet period ahead of the April FOMC meeting.
Vols were increasingly bid as the day wore on and weakness continued. Implieds softened slightly on the rally into the close, but the entire curve still managed to close higher out to June 2022. SPX 10d RV trickled back into single digits, while VIX bounced off its 52-week low to close on a 17 handle.
Index flows were muted but did lean to the downside. VIX was active with solid two-way flows as accounts initiated protection by adding upside and played for rolldown. In credit, HYG put spreads dominated downside activity.
We saw a shift in China sentiment outside the US, with activity turning bullish via outright calls and call spreads bought. In single stocks, with Tesla (NASDAQ:TSLA) dropping the most in almost four weeks, we saw a couple of large call spreads printing, likely rolling out shorts in January 2022.
USTs' Bear Steepens, 20y Auction Looms
US Treasuries shed some of last week's curious rally with long-end yields 3.5bp cheaper even with equities in the red. With the USD cheapening, the front end remained better bid with 3y richer on the day. The 3y buyback saw the Fed slightly more aggressive than usual, at least from what we could see, and rallied significantly off the lows relative to 10:30 levels.
The 2Y:3Y:5Y spread was almost 2bp richer, taking out much of the optical cheapening after the 3y roll. I still don’t mind being long on the fly to lean short duration following the 15bp retracement in belly yields in April.
20-year yields were the worst performers on Monday despite increased discussion on the supply/demand dynamics with the Fed and Treasury considering altering buyback/auctions. Most participants seem more comfortable remaining long as these discussions progress, but remember that $24 bn CT20 needs to be reissued on Wednesday.
With that said there was better selling of the issue from overseas and I think there is room for a supply concession with the fly at the rich end of the range. Recall last month, despite the auction stopping through 1 pm levels, and that was not until after a good size concession on auction day.
Other flows saw better selling in the belly, 5s through 10s, real and fast money. That theme has persisted through the last few days, with generally better selling of duration.