ZERO HEDGE Another day, another 12 swings of greater than 0.

75% in S&P futures as volume slid to the lowest in a week and second lowest in two weeks. Credit and equity markets stayed largely in sync (as they have for the last few days - with slight beta-adjusted underperformance of credit) until around lunchtime and then a funny thing happened to investment grade credit. http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/09/2 0111006_ESswings.gif

At around 12:30ET, the most liquid credit index, IG17, gapped tighter as ES and HY reversed briefly off the highs and then IG did not stop compressing 3-4bps more into the close - notably outperforming HY and ES (its far higher beta cousins). http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/09/2 0111006_ESIGHY.gif

At the same time, the less liquid but hugely levered (and exposed to correlation traders, tail-, and jump-risks), IG9, cracked very notably tighter (from our runs around 15bps) to 147bps. IG9 had held up as markets rallied but this move's magnitude and velocity suggest more than just some hedge adjustments and while the rest of the risk assets we cover were all levitating, this 'capitulation' stands out among them. Certainly that move in IG9 - with its accompanying on-the-run hedging - is likely what helped IG17 dislocate from equities today and we wonder if it was the ammo the market needed to exhaust as we head into tomorrow's NFP extravaganza. http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/09/2 0111006_FX1.gif

After Europe close, FX markets went into drift mode as the dollar just leaked to one week lows with EUR managing to hold well above 1.34 and all the majors (apart from swissy and cable) made new highs (vs USD) for the week). CAD is the best performer since Friday and once again we note JPY's stability - something perhaps Mr. Trichet should look t.

TSYs never looked back once Europe had closed and are now notably higher in yield on the week with 2s10s30s at 75bps now 8bps higher on the week and an impressive 25bps off Tuesday's lows. We suspect the 2s10s30s carry trade that we discussed so much last year (and prior to Twist) is back in play again, helping fuel some of this re-risking of the last few days. Arguably at current levels, 2s10s30s suggests ES should be 1175-80 so perhaps the underperformance of ES suggests that early fuel is running low.

Commodities kept on trucking today with oil taking out $82.50 (up 9% from Tuesday's lows) and Silver clearing $32 (up almost 12% from Tuesday's lows). Gold is behaving relatively well given the chaos surrounding it - stabilizing around $1650 and holding around 1.75% higher on the week, which compared to only a 0.45% loss in the USD seems reasonable for anyone.

After leading risk down, ES seemed to be leading it higher also in CONTEXT over the medium-term and in the short-term, thanks to the moves in 2s10s30s and oil (as well as AUDJPY), equities remain cheap here - believe it or not. However, the correlations have been incredible and this feels like a light switch wil flick and reverse it. The most clean signal we have of relative performance is longer-term against HY and equities remain expensive. Moreover, a model we often look at with regard to SPY in the context of TSYs and IG credit (IEF and LQD) is very much at the top of its highly mean-reverting channel - suggesting if nothing else that equity needs to pause for bonds to catch up. It seems that tomorrow's NFP will be the center of attraction though little action this week seems predicated on any fundamental analysis of what is an increasingly concerning endgame overseas - the focus on a localized domestic (US) point-in-time print when all around us is asunder, seems fickle at best and ignorant at worst.

IG9 is CDS index on corporate paper. The higher the spread, the more likely that some corporate entity will default on some coupon of their bonds. Therefore, if IG9 trades higher (in spread), it is bearish for the underlying corporations in the index (for a list, look here: http://lcdx.wikidot.com/ig9-summary), because presumably a corporation that cannot service it's debt is a sell, not a buy. On the other hand, the S&P and other equity indexes that include many of the corporations in the aforementioned IG9 are trading higher, which is contrary to the credit market (IG9) which is trading at a higher spread. In other words, credit and equity should be inversely correlated, and that inverse correlation is used by traders for hedging equity indexes. Which is why the article asks 'Did credit just capitulate?', because the gap up in IG9 indicates a move to risk OFF, and credit markets are usually a more reliable indicator than equity markets. I think .... No problem, happy to help out. Equities are still on a tear today, so it is either the corporate credit market is about to reverse, or we are seeing yet another Friday pump n dump, just in case there are any greater fools still left in equity markets. 90D commercial paper seems to be holding steady for non-financials, but there is no secondary market for it, so it tends to be a lot more stable than CDS. I assume that IG9 is primarily used for hedging equity indices, rather than being a useful indicator of short term corporate debt stress. 30/60/90D non-asset-backed commercial paper in financials on the other hand seems to be extremely volatile, although I'm not sure how big that market is as financials tend to use other instruments for short term funding (repos, swaps, bankbills). http://www.federalreserve.gov/releases/cp/rates.htm Even a traditionally optimistic Michael Darda, of MKM Partners, is having trouble discovering the silver lining among the flotsam and jetsam that is the global macro-economic ocean currently. The Japanification theme continues with five charts offering too-correlated-to-beignored perspectives on equities, money supply/velocity, valuations/multiples, and demographics. An updated chart of Japan versus U.S. equities is breathtakingly grim. This chart originally ran as a Bloomberg Chart of the Day back in August. The chart may tell us what is in store if eurozone policymakers fail to forestall a collapse of Italy/Spain. The ECB's reluctance to even take back the errant rate hikes imposed earlier this yearthe least it could do, in our viewis not

A high ratio of liquidity doesnt guarantee a rise in risk assets or nominal income, as Japan has found out over the last two decades. Tightening credit markets are an ongoing threat to the velocity of money.

Low long rates have not led to higher P/E ratios in Japan. Moreover, long rates tend to move with expected nominal growth prospects, which is why they have been closely correlated to movements in equity prices over the last several years.

Like Japan, the U.S. is facing demographic challenges, albeit not to the same degree (i.e., we are not headed for negative population growth). However, the Federal Reserve Bank of San Francisco has done work on equity multiples and societal age distribution (middle-aged cohort versus the old-age cohort) and has found a stunningly close relationship that does not bode well for a rise in earnings multiples from here. Indeed, the researchers note that, the actual P/E ratio should declineto 8.3x in 2025 before recovering to about 9x in 2030.