European Stocks & Bonds Battered By Return Of LTRO Stigma
When the ECB first announced the LTRO in late 2011 (and executed in early 2012) we explained how the ECB's encumbrance via this 'aid' is in fact a major negative for the rest of the capital structure. We were proved correct and even as Draghi lied and stated there was no stigma, the market priced the LTRO-encumbered banks notably weaker. Of course, the banks with the greatest need for support were the ones who grabbed the ECB's punchbowl that time and it seems as fears re-awaken in Europe, risk-appetite towards these ECB-dependent banks (relative to non-LTRO banks) is waning rapidly. The so-called LTRO Stigma (the spread between LTRO and non-LTRO bank credit) is back at 5-month wides as investors rotate away from any and every bank outside of the core. This weakness rubbed off everywhere in Europe as Italian and Spanish bonds saw their worst day since the Italian elections as European stocks slumped and Europe's VIX is now 4.5vols higher than Monday's open.
Banks are trading at their widest spreads in 5-6 months... and the stimage for LTRO names is clear
and the safety bid is now in Bunds and NOT in Swissie as 2Y Bund yields compress through swiss for the first time ever...
and while European stocks rose gently into the close, European sovereigns did not (at all)...
Italian bond spreads are now at 3 month wides over 350bps and Spanish bond yields back over 5%