European equities marginally outperformed credit markets on the day but both ended dreadfully as markets went bidless into the close. Ending the day the lows, having retraced over 75% of the 9/23 to 10/28 swing rally, equity and credit markets are well into bear market territory as sovereign risk morphs back into financials and on into corporates. Sovereign spreads may look 'optically' marginally improved if one focuses merely on the 10Y levels, but a little more digging shows that almost without exception sovereign spread curves all bear flattened considerably today with the short-dated risk rising dramatically relative to mid maturities as jump risks become more and more of a concern.
Equity (now 25.5% off its Feb11 highs) started to catch up to credit into the close but closing at the lows into a low liquidity low volume long weekend suggests more than a little risk aversion. Equity, Credit, and FX markets are more in sync in Europe than in the US (where stocks remain a little exuberant still) and are back to 10/05-06 levels.
And if one looks down the 10Y column - you could be mistaken for thinking it was a good day for sovereign credit (aside from Belgium and Greece - and Austria off the chart). But it was the massive underperformance at the front-end that is most worrisome as inversions are more and more likely and bear flatteners appear the trade du jour. We suspect this is as much about the unwind of the crowded short-dated higher-yield trade than an actual spec flattener trade.