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It has now been 2 weeks since QE3 and the S&P500 is a mere 3pts higher, US 30yr inflation break evens have now given back all QE3 gains and yesterday 10-year Treasuries rose for a 7th day, their longest run in 16 months.

The failure for risk assets to ignite on further stimulus (defying previous post QE rallies which have typically seen equities rally 10-15% over following 6 weeks) are leading investors to respond - note US volume at 6.7bln shares yesterday marked a significant uplift (particularly pre Yom Kippur).

We should assume - on the basis of the 1.76% underperformance of Cyclicals v Defensives (the largest single day underperformance for weeks) that much of the selling pressure was from funds that have positioned for QE liquidity rally.

An interesting factor is the developing divergence between European Sovereign credit vs European Corporate credit. Specifically since Sep 13th, Sovereigns have tightened to 137bps from 183bps whilst Corporates (XOVER) has widened to 548bps from 462bps. Therefore the corporate earnings headwind has clearly taken over as a negative factor.

We are seeing no dislocation in US credit/risk gauges (TED/Swap spreads, USD libor at 12 month lows). Technical supports remain in place - specifically for Euro/$ 1.283 and for S&P 1430. We see present de-risking (against backdrop of low gearing) as a pre-requisite for higher markets and we remain comfortable with our bullish short term view.

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