Credit/Risk Basket Update

 We will start with an intraday chart of commodities, Wednesday they held up well and provided support for the market to recover off the earlier intraday lows, but since then, they have been trending down. Remember the point of looking at Credit which leads equities and the overall risk basket is to judge the validity of a risk on move, it's sort of like a breadth indicator and we know when breadth is thin in the market, the move is highly suspicious. A risk on rally should include all risk assets, otherwise we are likely looking at a manipulation of equities and in the past these dislocations have provided good short entry set ups.

 Longer term commodities have been on the decline and this is how we knew something was wrong in China weeks before their Services and Manufacturing PMI data came out showing contraction. The PBoC which was fighting inflation just 3-4 months ago has changed gears and dropped rates, foregoing inflation and trying to boost a struggling manufacturing industry, not to mention the housing crisis China is going in to. It's amazing to me that so many countries are just entering a housing bust, China being an example, Hungary certainly a prime example. Commodities as of now, seem like a good play on a number of elements from a housing/development bust to contracting manufacturing, to different countries.

 Here's a larger chart of High Yield Credit , you can see how it has been a leading indicator, currently there's another pretty serious dislocation.

 Yields/Rates also act like a magnet for equities; on this intraday chart, the led on the Jan 3rd bounce from the intraday lows, since they have been dislocated and trending lower.

  On a longer chart, you can see where they led and made higher lows while the market was moving in to the October lows just before the October rally. Since they have been dislocated as well.

 The Euro gave a little support to the market this morning, but it remains severely dislocated from the legacy arbitrage correlation as we move through longer timeframes.

 For example, this chart covering the start of the new year shows the Euro moving significantly lower which is what we expected (remember after the initial break of $1.30 we expected and saw evidence of a Euro based bounce as the longs at $1.30 were substantial. We were looking for the next break of $1.30 to be decisive and lead the Euro lower, which is happening now. The ECB's LTRO has been a failure thus far with banks depositing a record level of money in the ECB's deposit facility on a reverse carry trade, the exact opposite of the purpose of the LTRO. Banks are willing to take the LTRO money for a 3 year term at 1% and redeposit it right back at the ECB for a .75% interest rate, which makes it a -.25% carry; rather then taking that 1% money and buying BTPs yielding close to 7% for a positive +6% carry trade (which is what the ECB intended with LTRO). Predictably, the banks are shoring up their tier 1 capital base, something they've been doing for the last 5 months. Why the ECB didn't see this coming is beyond me, the banks were told to raise huge amounts of cash, yet the ECB thinks the banks will get this VERY HARD to find 3 year / 1% funding and will just buy up toxic debt?  Nothing new really as all EU plans have been predictable failures.

 On a 30 min chart, the Euro/S&P dislocation is rally seen. Generally speaking, each EUR/USD pip is equal to 2 Dow points, I can't even imagine what the true correlation would be if the DOW or when the DOW returns to the correlation, I'd guess close to 800 points.

 And every time I have shown you the daily EUR/USD chart, I've always said I expect the Euro to move to the bottom channel, which means the next target on the Euro s below $1.20. Things may get dicey between the Central banks and currency interventions, but generally speaking, if you have the firepower to ride out the draw down, the F market trends much better then equities.

Finally High Yield Corporate Credit continues to sell off and today is a prime example of the dislocation, I would expect equities to revert toward credit as they have been shown to do historically.