Dismal End To Day After In Europe

Tyler Durden's picture

Just when you thought it was safe to go all-in buying financials, stocks, commodities, Chinese IPOs and even Tilson's fund, the last few hours of Europe's day was very disappointing. Commodities took a fairly serious plunge as the dollar strengthened (macro data? or just a reality slap). Credit and equity markets oscillated but legged down into the close and ES also slipped to day's lows as we closed. Sovereigns were on a tear, thanks obviously to a helping hand early on from ECB's SMP program, but even they started to leak back wider in spread and higher in yield into the close. It was not cataclysmic, obviously, but was hardly the follow-through risk-on day that so many had hoped and dreamed of last night and most notably, broad risk assets in general have been leaking lower since US close last night, leaving ES rich relative to CONTEXT.

Equities actually underperformed credit on the day (relatively speaking), which makes some sense given the relative outperformance yesterday. Interestingly Main (European investment grade spreads) and SENFIN (European financial senior debt spreads) were more volatile (judged on empirical beta basis) than the higher risk SUBFIN (subordinated financials) and XOver (high yield credit) as we suspect traders sat on their hands a little and used the lower cost credit instruments to express an opinion as opposed to being highly convicted and risk-on. Senior-Sub differentials widened - again making sense - leading to an optical outperformance of senior spreads (driven mainly by technical flows). All-in-all, not a great follow through at all in credit and equity.

EU Sovs (aside from Portugal) have rallied since the global bailout (dotted vertical line in the chart above) and just as Italy and Spain (and to a lesser extent Belgium) started to leak wider this morning, the market jumped suggesting someone with a bottomless balance sheet and no MtM worries wanted to buy some (cough ECB cough). That helped pull Spain and Italy yields and spreads back to multi-week lows but as we entered the last hour (and they stopped buying) the reality was obvious and we leaked back wider and higher in yield (red ovals). The redemption fund chatter did not seem to help too much.

It wasn't all happiness though as Belgium saw quite notable curve flattening, as did Ireland. We also notice that the CDS-cash basis moving around on several of the peripheral sovereigns - we suspect the gap yesterday and bigger squeeze in Sovereign CDS (and SovX) pushed CDS too far and encouraged some basis traders back in. That would help explain why SovX (the sovereign credit risk index) was 10bps wider on the day (after tumbling 40bps yesterday from its wides) and bonds outperformed. The basis had got very attractive again and encouraged traders to buy bonds and buy protection to lock in a lower risk arb - especially if funding stresses are lower which is also a significant driver of the basis. Point being - some of the strength in sovereign bonds today is likely driven by arbitrage traders (which helps liquidity) and should not be seen as any evidence of safety; if rules are changed again or any CDS actions or PSI rhetoric picks up, expect exits rapidly and the ensuing impact on bonds.

Commodities are not helping and look decidedly weak in terms of risk-on. This adds to concerns that the equity stability in the US is not supported - especially as we see financials start to lag again.


Finally, CONTEXT has been slipping from the last hour of yesterday's US session suggesting the strength in equities remains less than supported (for now) by global risk drivers. A shorter-term calibrated version of CONTEXT sees the intraday market microstructure holding up well for now though as correlations remain lower than normal but still high.

Charts: Bloomberg

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Snakeeyes's picture

As I said on TV yesterday. there is NO WAY that this would work other than a two stall of the Euro death sentnce.



Sunset chaser's picture

Damn, just when I was about to go all in on Tilson and Bove's picks!

Buck Johnson's picture

I totally agree, and we are seeing it now today and tomorrow also.  This was to inject liquidity into the market and it failed.  If this market was doing so good from what happened yesterday and the result from yesterday.  It should have been up again today, and it wasn't.  All they are doing is stalling for time, for what they don't even know maybe a miracle.

mktsrmanipulated's picture

quick question about the bund....if Gemrany leaves Euro what happens to the bund...rally?

TradingJoe's picture

I think it is pretty fucking normal to have a down day after a 500 points rally, eh?!?! Jesus!!! One can only wonder!

SilverIsKing's picture

Agreed.  Fresh money to play with sends markets higher.  People faded the morning rally but I think we'll continue to head higher for a while now.

LawsofPhysics's picture

Everyone in the EZ is having their "Lebowski moment" and getting their money out.  When is Ron Paul going to get and answer from Ben Bernanke on who all the money has gone to in Europe?  

Sunset chaser's picture

The EU has little choice but to let some hard defaults occur, while trying to minimize the fallout.

Trying to sustain their enormous debt burdens with the printing press risks recreating Weimar Germany type inflation leading to another World War.

The only solution involves erasing the debts before printing the money. There is not going to be a soft landing. Crash dead ahead!!!!!!

SheepDog-One's picture

Oooo these Hopium binge hangovers keep getting more skull splitting every time.

Falcon15's picture

Half life of the last Hopium dose: 12 hours.

pepperspray's picture

No, Gensler said nobody is going to jail.

SheepDog-One's picture

Nooooo...nobody goes to jail! Well, except for this poor schlub who was administered a near fatal beating by the cops, who MISTAKENLY thought he was a shoplifter at Walmart...

Vid cops almost kill a guy at Walmart today.flv - YouTube

Schmuck Raker's picture

I didn't watch as I abhor violence.

I'll just assume the victim was another Deaf Senior Citizen.

SilverIsKing's picture

If the cops got the wrong dude, he just hit the lottery.  If they got the right dude, he just hit the lottery.

He won't need to shoplift anymore.

SheepDog-One's picture

Theyll get back to him on that wrongful beating lawsuit....in about 12 years.

Spastica Rex's picture

Boots+faces, get used to it.

Pegasus Muse's picture

a generous number of 7.62mm holes for anyone that tries.  get used to it.

Spastica Rex's picture

Good luck to you, and I don't mean that in a sarcastic way.

slaughterer's picture

US equities are also underperforming credit quite alot today as well.  Which again makes sense when one looks at equity outperformance yesterday.  We usually see DOJI formations  the day after Fed-liquidity announcementsl, so I would expect the US markets will close UNCH.  With Merkel behind the podium tomorrow, I would expect a gap down overnight.  

lolmao500's picture

OT :

Having More Than 7 Days Of Food Makes You A Suspected Terrorist


Jena's picture

Washington D.C. police say that having a DVD about knowing your right makes you a suspect.


Schmuck Raker's picture

Will this be the end of Jon Huntsman and Mitt Romney as Presidential candidates?

lolmao500's picture

Of course not, laws are not used against the elite.

Schmuck Raker's picture

Thanks Tyler, I can feel my knowledge growing.

unionbroker's picture

im amazed that they allow Merkel to speak she is the only semi sane one in the whole bunch

slaughterer's picture

Merkel is tired, and comes across as stubborn, awkward and market-unfriendly.  What she wants Draghi to do with his "independence" is the $14trillion question.

TheGardener's picture

Never trusted that bitch. She always did what she got instructed to do by her international handlers, after some posturing and dragging her limb feet.

Draghi`s supposed "independence" would be to let things run their course and finally kicking Germany out of the EURO.

That would, however prolonged , be Germany`s only choice for good,she wouldn't be allowed to do it on her own. New DM ,
New start , new credit ,new slavery . Slavery is out of fashion, so let's hope the fairy tale will not have the fairy merklie as the heroess.

gjp's picture

In the meantime US equities are back to tech and consumer leadership.  Highest valuations in the equity world, dependent on the most overextended consumers.  But as long as they can print money it's all good.

slaughterer's picture

Yes, but who can really buy AMZN with a 103 P/E?

justanothernerd's picture

Does anyone know in any detail how the CONTEXT model works and how to trade the spread?

xcehn's picture

The markets just represent a rigged casino to me at this point.

ucsbcanuck's picture

Getting that feeling as well. I'm looking to GTFO. This is complete BS at the moment. Might just be a little tired and depressed as well - cannot believe it, made all the right calls wrt banks etc, but... dog balls. Very different from the dog's bollocks.