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Europe Has Worst Day In Six Weeks

Tyler Durden's picture


The divergence between credit and equity marksts that we noted into the European close on Friday closed and markets sold off significantly. European sovereigns especially were weak with our GDP-weighted Eurozone credit risk index rising the most in six weeks. High beta assets underperformed (as one would expect obviously) as what goes up, comes down quicker. Stocks, Crossover (high-yield) credit, and subordinated financials were dramatically wider. Senior financials and investment grade credit modestly outperformed their peers but also saw one of the largest decompressions in over a month (+5.5bps today alone in the latter) as indices widen back towards their fair-values. The 'small moderation' of the last few weeks has given way once again to the reality of the Knightian uncertainty Europeans face as obviously Portugal heads squarely into the cross-hairs of real-money accounts looking to derisk (10Y Portugal bond spreads +224bps) and differentiate local vs non-local law bonds. While EURUSD hovered either side of 1.31, it was JPY strength that drove derisking pressure (implicitly carry unwinds) as JPYUSD rose 0.5% on the day (back to 10/31 intervention levels). EURCHF also hit a four-month low. Treasuries and Bunds moved in sync largely with Treasuries rallying hard (30Y <3% once again) and curves flattening rapidly. Commodities bounced off early Europe lows, rallied into the European close and are now giving back some of those gains (as the USD starts to rally post Europe). Oil and Gold are in sync with USD strength as Silver and Copper underperform - though all are down from Friday's close.



GDP-weighted sovereign risk across all of Europe has been range-bound for four months and this last rally never made it back to the low end of the range. Today's jump (in 10Y bond spreads) is the biggest in six weeks with Italy +26bps, Portugal +224bps, and Spain +14bps.



Portugal's bonds underperformed CDS on the day as the basis exploded downward (illiquidity). Portugal CDS are trading 42/43% upfront now against 5Y bonds priced at 49.725 (22.6% yield) offers those who still believe CDS are a useful insurance contract some very nice upside for the basis package and while the discrepancies are small for now, we are starting to see some differentiation in Portuguese local vs non-local bonds at the longer-end. In the belly, it is clear that the Cash-CDS basis package is bringing some interest as the Feb 2016 Portugal issue (closest to 5Y CDS maturity) outperformed its peers today (and is a little rich now to the non-local law Oct 2015 bond). Away from Portugal, the differentiation between local and non-local law bonds is increasing with Italy, Spain, Greece, and Ireland all showing Non-local law bonds trading at significant premia to local-law now.


European stocks and credit underperformed significantly (worst day in six weeks in most cases) and we are seeing the higher beta indices underperform (high beta is not a uni-directional bias as some seem to think). The clear up-in-quality (Senior and IG, Bunds/TSYs) and up-in-capital structure (from equities to bonds) suggests the last few weeks of momo chasing may be coming to an end.

Charts: Bloomberg

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Mon, 01/30/2012 - 13:03 | 2109995 Benedict Farse
Benedict Farse's picture

Priced in. 

Mon, 01/30/2012 - 13:07 | 2110010 Silver Bug
Silver Bug's picture

Get ready for a lot more days like this.



Mon, 01/30/2012 - 13:14 | 2110044 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Luckily the US is decoupling!

USA!  USA!!  USA!!!

Mon, 01/30/2012 - 13:19 | 2110069 Manthong
Manthong's picture

 "Portugal heads squarely into the cross-hairs of real-money accounts looking to derisk"

I didn't know there was any real money still in.

Mon, 01/30/2012 - 13:28 | 2110090 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

There isn't!  All real money is in the USA!  US stocks, and US bonds, because the US is the steam roller, er....I mean engine, of growth!

We have unlimited money thanks to the alchemist's money printer!  And we will pay it back....one day in the [cough] near [cough] future! 

Please cough one more time for me....


Sorry, but it looks like you have a hernia....

USA!  USA!!  USA!!!

Mon, 01/30/2012 - 13:32 | 2110113 economics1996
economics1996's picture

USA, USA, Red Team, Blue Team, USA, USA!!!

Mon, 01/30/2012 - 14:11 | 2110257 CClarity
CClarity's picture

Team US Treasuries is really screaming today.  The 5 year yield at .72 !!!  Just 5 years ago that baby's yield was 6 1/2 times higher at 4.83%  Living in skewed, make that"screwed", times.  

Mon, 01/30/2012 - 13:20 | 2110075 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Japan will print soon, maybe tonight.

Mon, 01/30/2012 - 13:23 | 2110086 mattu13048
mattu13048's picture


Mon, 01/30/2012 - 13:25 | 2110092 mattu13048
mattu13048's picture

Do not worry children, Hitler will come up with something to get thing back in order. 

Mon, 01/30/2012 - 23:19 | 2111738 StychoKiller
StychoKiller's picture

"Springtime for Hitler and Germany.

Winter for Poland and France!"

Mon, 01/30/2012 - 13:11 | 2110029 moonman
moonman's picture

But just the other day Cramer told me I needed to get in the market or miss the rally. This was reiterated by the muppets on MSNBC and Bloomberg.

Mon, 01/30/2012 - 13:17 | 2110058 brewing
brewing's picture

facebok ipo should turn things around, just like GRPN...

Mon, 01/30/2012 - 13:33 | 2110116 Manthong
Manthong's picture

I've got a sneaking feeling that issuance will end up being iconic.

Surreal valuation and expectation meets market that suddenly finds itself in need of a reality check.


Mon, 01/30/2012 - 13:12 | 2110032 TooBearish
TooBearish's picture

no effect on the migHTY ndx and aapl!!!! btfd

Mon, 01/30/2012 - 13:14 | 2110042 lolmao500
lolmao500's picture

If we believe hard enough, all will be alright! Just like prayer!

All hail John Maynard Keynes, our God!

Mon, 01/30/2012 - 13:19 | 2110060 NEOSERF
NEOSERF's picture

Now that it is clear the ECB will buy anything with no-value collateral in return, any failing euro country strategy should be akin to the Indianapolis Colts "Suck for Luck" draft strategy...take the fascade off the middling economic numbers (GDP, unemployment etc), show how bad things really are and then MAKE the ECB take all of your bad debt...same as a default without all the problems...perhaps this is the strategy...one HUMONGOUS strategic default of the the vapor-entity ECB in 2015 and the countries themselves emerge unscathed...

Mon, 01/30/2012 - 13:18 | 2110067 falak pema
falak pema's picture

roller coasters are like this. I don't understand why it surprises the crowd. The day we have a true tipping point without return, now that is when the Oligarchs run to their bunkers!

Mon, 01/30/2012 - 13:22 | 2110078 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Everyone heard what Jimmy Rogers said today?

No one leaves the euro this year....alive!

Well he didn't say, "Alive", but that is what he meant.


Mon, 01/30/2012 - 13:46 | 2110158 RiverRoad
RiverRoad's picture

You bet it's a bad day, especially with Sarkozy threatening to do the Tobin Tax as a Final Solution.

Mon, 01/30/2012 - 13:51 | 2110183 Eally Ucked
Eally Ucked's picture

There is one interesting aspect of LTRO which pushed up prices of all bonds below 3yr, what if Greece defaults and Portugal becomes next target? Will those 3yr and shorter maturities turn into another pile of rubish on european banks books?

Mon, 01/30/2012 - 13:52 | 2110189 Texas Ginslinger
Texas Ginslinger's picture

Jan. 30 (Bloomberg) -- Spanair SA's collapse after the withdrawal of state funding suggests Europe's debt crisis may spur airlines from the Mediterranean to the Baltic to consider mergers or risk failure.




Mon, 01/30/2012 - 14:12 | 2110255 carbonmutant
carbonmutant's picture

Global business is dropping off a cliff.

Dragging on Gold....


Mon, 01/30/2012 - 14:31 | 2110313 Sudden Debt
Sudden Debt's picture

My worst day was saturday morning... I had one big ass hangover you can't believe... and my mouth tasted like a ash tray while my kids where awake at 7 o'clock and my wife was pissed because I just got to bed a hour before that.

Mon, 01/30/2012 - 14:31 | 2110315 bugs_
bugs_'s picture

how did euro day go?

Mon, 01/30/2012 - 14:35 | 2110327 Snakeeyes
Snakeeyes's picture

And our personal consumption expenditures were FLAT in December as households increased savings. Not good for 70% of GDP!

And the Fed is trying to get more households into debt! Nice f***ing Central Government planning!

Personal Spending Flat in December, Households Increase Savings: Should The Fed Be TemptingHouseholds To Take On MORE Debt?


Mon, 01/30/2012 - 14:42 | 2110343 The trend is yo...
The trend is your friend's picture

eu closes and us stocks go up as usual, the great decoupling continues

Mon, 01/30/2012 - 14:54 | 2110370 nudlee
nudlee's picture

there must be a rumor behind this us rally, prolly "greek deal is AT AN INCH (this time for sure, we promise)"

Mon, 01/30/2012 - 14:45 | 2110352 The trend is yo...
The trend is your friend's picture

seems like goldman might of been right, i'm covering my short in the russell

Mon, 01/30/2012 - 15:07 | 2110405 SmoothCoolSmoke
SmoothCoolSmoke's picture

Dow heads up.  I say SuperBowl prop job.  Can't have Mom and Pa Retail moping around on SB Sunday cause the Dow had a down week.  Got keep 'em pumped up so the shiny new SB ads will work.

Mon, 01/30/2012 - 16:15 | 2110660 carbonmutant
carbonmutant's picture

In other news:

Belgium's first general strike in almost two decades brought parts of the country to a halt on Monday in an anti-austerity protest aimed at the new government and at EU leaders meeting in Brussels


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