Euro VIX Jumps As ECB Pumps

Tyler Durden's picture

Depending on whether you look at broad liquid risk markets or narrow manipulated 'repressed' illiquid markets, your take on today's European action will be different. Equity markets were crushed. Corporate and Financial credit spreads blew wider. Volatility (Europe's VIX) exploded over 36%. So far so good? But Italian and Spanish bonds rallied. It seems EUR96 was the line in the sand that the ECB (or their proxy banks) decided was enough for Spanish 10Y bonds and that was where they were defended to (though we are suspicious why ECB would step in now after 4 months absence). There was eventually some notable divergence between underperforming Spain and outperforming Italy by the close (+40bps on the week vs +27bps). We suspect that much of the sovereign outperformance was a combination of Sovereign CDS-Bond basis traders (buying bonds and buying protection in Spain to lock in that wide spread) and a replay of the short financial credit, long domestic sovereign credit trade (as in banks will underperform the sovereign if things hit the fan/wall). That is the flow that was evident when looked at across markets. All in all, a terrible end to an awful week and hopefully we have helped explain why sovereigns outperformed (technicals) as CDS remain at wides and stocks at lows.

Stocks and credit plunged...

 

Euro VIX surged...

and while sovereigns looked like they improved...

but the CDS-Cash basis is the real signal (not real money buyers)

and the Financials vs Sovereign trade was very active early on (and once it had been put on...look how the sovereigns leaked back wider...)

it appears like it was sovereign basis traders and financial-sovereign pairs traders that were to blame for the optical improvement - don't believe your eyes.

Will Boaz Weinstein claim JPM and Spain scalps?

Charts: Bloomberg