Europe Drops Most In 3 Weeks As LTRO Stigma Hits New Highs

Tyler Durden's picture

With Chinese and European data disappointing and Weidmann commenting on the futility of the 'firewalls' (as we discussed earlier) ahead of the discussions later this week, European equities dropped their most in almost three weeks over the last two days closing right at their 50DMA (the closest to a cross since 12/20). Credit markets (dominated by financial weakness) continue to slide as the LTRO euphoria wears off. The LTRO Stigma, the spread between LTRO-encumbered and non-LTRO-encumbered banks, has exploded to over 107bps (from under 50bps at its best in mid Feb when we first highlighted it) and is now up over 75% since the CDS roll as only non-LTRO banks have seen any improvement in the last week. Aside from Portugal, whose bonds seem to be improving dramatically on the back of significant Cash-CDS basis compression as opposed to real-money flows as the spread between Bonds and CDS has compressed from 500bps to 250bps on the back of renewed confidence in CDS triggering, sovereign bond spreads are leaking wider all week with Italy and Spain worst.

 

Europe's broad equity market dropped most in 3 weeks and ends right at its 50DMA...

And financials are bearing the brunt of the selling as LTRO-encumbered banks have been battered realtive to non-LTRO (so much for that non-existent Stigma eh Mario?)...

 

Credit and equity moving together though XOver remains a little excessive relatively speaking which is noteworthy given its more high beta nature. This suggests the pressure is focused on the financials (which in turn drags the IG (main) index down (wider))...

Sovereigns have been leaking wider all week in bond-land (less so in CDS as bonds catch up to them)...

but Portugal stands out (removed from chart above for scaling) down 130bps this week - which is driven seemingly by a dramatic compression in the CDS-Cash basis as confidence in sovereign CDS encouraged risk-takers back into the trade - i.e. basis traders willing to accept less premium for CDS non-trigger risk as the basis is massively wide compared to others still,..

 

 

Charts: Bloomberg