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Well, I felt smart for about 10 hours...

Yesterday as stories came out supporting QE3, ECB bond purchases, and EFSF getting supersized to a trillion euro, I cut remainder of short and got long. Stocks finished strong and as I was calling it a night at 11pm, futures were up decently as well. My dreams of sugar plum fairies and a double digit gain for ES over night have been crushed. The overnight session traded almost 2% down from its highs 1264 -> 1240.
                                                                                           It seems that the lack of liquidity that first hit SOVX over a month ago is spreading. Yesterday the S&P would move up and down 0.5% on nothing. It would move 1% at slightest hint of news. European stocks seem to be following that trend. Credit liquidity in Europe is getting worse again - if that is possible. XOVER had a tight print of 468 today. It drifted wider and then hit an air pocket - it went from 486 to 498 on 5 trades in the street. It is back to 489. HY lagged stocks yesterday. HYG actually finished slightly down, but that makes sense, as I felt that the ETF's were trading to an NAV that was skewed to the offer side of the market. The cash bonds felt okay into the close yesterday, but that just meant that traders weren't afraid to make a bid.

The CRIS page doesn't seem to be confirming the stock sell-off. I'm seeing Italian and Spanish 10 year yields moderately better on the day. I would have expected to see them worse given the decline in stocks.   SOVX and FINS are both tighter, though well off their tights. Hmmm. XOVER just moved 4 bps, back to 493 while I was typing this (and I'm a fairly fast typist).

I am going to give the small long a little longer to play out (and I do mean a little longer). I want to see how the U.S. reacts as maybe the U.S. will shrug off Europe's renewed weakness (since we did finish strong) and maybe the ECB was waiting until we wake up before making some announcement. My bias is still to be short HYG/JNK over SPY as it feels like upside remains limited in high yield and with XOVER breaking down on no volume, it is easy to see that impacting high yield.

One new thing to keep an eye out for is what is happening with EM debt. That has been very strong through the entire sovereign debt crisis, but it sounds like recently there has been some profit taking. Maybe people taking some chips off the table and cutting some winners along with their losers, but maybe some fear about global slowdown. So far, nothing particularly ominous about the trading there, but another market to keep on the radar screen.