As Europe opened last night markets were very weak with Sovereigns gapping
dramatically wider and equity and credit markets under pressure. Just as in the
last few days in Europe though, early weakness has been tempered by a modest
belief that the ECB will save us all if it gets bad enough. Today was a little
different - as we noted it appeared the ECB was starting to play chicken a
little more vocally and while equity, credit, and sovereigns rallied in
their usual way off the open - there was one critical difference - financials
did not. Early on it was clear that many traders were looking to place
the short-financials, long-sovereign credit trade, this
implicitly forced LTRO-encumbered banks to underperform (as Greek, Italian, and
Spanish banks were crushed in stocks and spreads) moving the LTRO Stigma
wider still - back near record wides (and subordinated spreads starting
to decompress from senior again). The EURUSD was choppy but
once the ECB headlines hit and rumors swirled of more bank runs, cessation of
support, and capital controls, it fell back below 1.2700 once
again (only to surge a little into the Europe day-session close - back
to unch. Treasuries and Bunds were in lockstep - leaking higher in yield as the
technical support for sovereigns came in (not from the ECB but via our
financials-sovereign spreads arb) but this gave way into the close as risk asset
weakness dragged yields lower in Germany. US equities faded into the Europe
close (as normal) ending back at a balanced VWAP, with EU financial stocks down
over 1% on average, and EU stocks overall down around 0.75% (BE500).
LTRO Stigma widened still further as financials underperformed - led by LTRO-encumbered banks...
but sovereigns rallied from early weakness as the financials vs sovereigns trade was the dominant technical - keep watching this as it will inevitably lead to sovereign weakness in a vicious circular manner...
Subordinated spreads have finally started to leak wider relative to senior spreads with today seeing that increase...
Charts: Bloomberg
LTRO Stigma widened still further as financials underperformed - led by LTRO-encumbered banks...
but sovereigns rallied from early weakness as the financials vs sovereigns trade was the dominant technical - keep watching this as it will inevitably lead to sovereign weakness in a vicious circular manner...
Subordinated spreads have finally started to leak wider relative to senior spreads with today seeing that increase...
Charts: Bloomberg
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