Credit Plunge Signals 'All Is Not Well'
European (like US) stocks remain in a narrow range just above the cliff of the unbelievably good NFP print of 2/3. US and European credit markets have lost significant ground since then and it seems equity investors just want to ignore this 'uglier' reality for now. The BE500 (Bloomberg's broad European equity index) is unchanged from immediately after the NFP 'jump', investment grade credit is +10bps from its post-NFP tights, crossover (or high yield) credit is around 50bps wider, Subordinated financial credit is +50bps off its post-NFP wides at 382bps, and senior financial credit is an incredible 36bps wider at 225bps (by far the largest on a beta adjusted basis). The divergence is very large, increasing, and a week old now and perhaps most importantly as we look forward to LTRO Part Deux, LTRO-ridden banks have underperformed dramatically (40bps wider since 2/7 as opposed to non-LTRO banks which are only 10bps wider) - how's that for a Stigma? Some 'banks' have suggested the underperformance of credit is due to 'technicals' from profit-taking in the CDS market - perhaps they should reflect on why there is profit-taking as opposed to relying on recency bias to maintain their bullish and self-interest positioning as the clear message across all of the credit asset class is - all is not well.
European financial credit is at over a two-week wide here and across the board credit markets have underperformed since the NFP print - perhaps they saw through the headline numbers?
European financial stocks ignored credit last week and then caught up, we now see the divergence growing dramatically. If nothing else, its an arbitrage opportunity but the drift in spreads is much more than technicals here and we suspect is a realization of the growing impact on the capital structure of banks of the ECB sucking up all the collateral supporting it (while capital is not exactly being raised hand over fist).
The most glaring divide remains the 'stigma-trade' where we have seen LTRO banks underperform dramatically (wider by 40bps) over non-LTRO banks (wider by only 10bps) and this is perhaps the key for why banks overall are underperforming.
Either way, it should be drastically clear to any and all (that choose to look and not ignore relaity in the interest of a fiat-currency-numeraire-based stock market 'hoping' for more printing) that all is not well in the Euro-zone. It is also not just Europe (as we have discussed for a week now) as high-yield credit in the US is also sending warning signals.
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