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Is Europe Starting To Derisk?
While the ubiquitous pre-European close smash reversal in EURUSD (up if day-down and down if day-up) was largely ignored by risk markets today (as ES - the e-mini S&P 500 futures contract - did not charge higher and in fact rejected its VWAP three times), some cracks in the wondrously self-fulfilling exuberance that is European's solved crisis are appearing. For the first day in a long time (year to date on our data), European stocks significantly diverged (negatively) from credit markets today. While EURUSD is up near 1.3175 (those EUR shorts still feeling squeezed into a newsy weekend), only Senior financials and the investment grade credit index rallied today, while the higher beta (and better proxy for risk appetite) Crossover and Subordinated financial credit index were unchanged to modestly weaker today (significantly underperforming their less risky peers). European financial stocks have dropped since late yesterday - extending losses today - ending the week up but basically unch from the opening levels on Monday. High visibility sovereigns had a good week (Spain, Italy, Belgium) but the rest were practically unchanged and Portugal blew wider (+67bps on 10Y versus Bunds, +138bps on 5Y spread, and now over 430bps wider in the last two weeks as 5Y bond yields broke to 19% today). The Greek CDS-Cash basis package price has dropped again which we see indicating a desperation among banks to offload their GGBs and needing to cut the package price to entice Hedgies to pick it up (and of course some profit-taking/unwinds perhaps). All-in-all, Europe's euphoric performance has started to stall as perhaps the reality of unemployment and crisis in Europe combine again with US's GDP miss to bring recoupling and reinforcement back.
European stocks (blue) dramatically underperformed credit. The up-in-quality rotation (and senior-sub decompression) trade is perhaps making a comeback as higher beta credit (and equity) starts to lag...
...as European financials (above) stock prices have dropped on higher volume in the last day or so (though off the week's lows obviously) but it was certainly not more of the same up, up, and away this week.
US equities reacted to this downturn too - and did not follow the EURUSD risk-on ramp (shown by the dark blue line above) and instead turned back down (at VWAP - light blue line) as Europe closed. With EURUSD near 1.32, ES is not following it, which we suspect is supported by the JPY strength (as its not EURUSD but EURJPY that is more critical in terms of correlation).
Spot the odd one out in European sovereigns.
Portugal has underperformed this week as it is interesting that the most headline-worthy names have outperformed - almost as if someone needed to maintain the optics for just one more week. Portuguese 5Y spread to Bunds is 436bps higher in the last two weeks.
And finally the cost of the Greek CDS-Bond basis package. It has fallen from 93% to under 88% in the past week. This drop has been mostly driven by a reduction in protection costs (and a small positive in GGB bond prices). While there are many different ways to interpret this cost (which will go to 100 if the CDS is triggered theoretically), we believe that profit-taking on the basis package was unlikely (though fair given the rising uncertainty and proximity of a decision) but as we heard last time we saw a dip in the cost, banks are willing to cheapen up the package to be able to offload larger volumes of GGBs from their books (and hoping to clean up their CDS exposure in the market - admittedly at a loss but a smaller bid-offer than bonds and not the kind of bidless liquidity that would happen if they just dumped GGBs onto the market). At around 87, risk-reward is attractive for hedgies (and gives them skin in the PSI game) but we suspect with the deal or no deal so close, they would prefer to watch from afar than jump in now.
Charts: Bloomberg
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What has changed in 6 months? Anybody?
The rate of debt monetization and printing.
Relax people, Obama has a plan.
"I Want An Economy Where We're Making Stuff And Selling Stuff And Moving It Around" -BHO, 1/26/12
Can't make this shit up. http://www.realclearpolitics.com/video/2012/01/26/obama_i_want_an_econom...
The EU has correctly seen the rescue of the individual states as paramount to saving the private sector. The private sector is now moving to the USA.
ECB's LTRO1 have flushed the Eurozone with extra liquidity, taken away a lot of risky assets from BBB- to AAA quality as collateral with ECB, and fixed the 2012 funding of banks. The fact that everybody now knows how to bet even bigger (for nearly no cost at 1% for up to 3 years) in February with LTRO2 makes the market very confident Eurozone can easily weather the truly anticlimatic impact from the now completely written off Greece hard defaul in March.
Believe it or not, the European Central Bank and that ex-Goldman guy Mario Draghi have actually pulled off a stunner. I never believed it could happen.
confidence continue to deteriorate.
I'm older, poorer, and more bitter.
"I'm older, poorer, and more bitter." and trying to derisk as much as possible. When in combat, is it not best to derisk, meaning running for the hills?
I derisk all the time and the risks keep finding me.
I'm younger, poorer than you are and more bitter than you could ever be.
Atleast you had decades of easy society to get ahead in. We never had a chance.
What has changed in 6 months? Anybody?
Well... The NBA settled the player strike... So instead of playing in front of PACKED audiences at Rucker Park & Morgan State University... They get to play in front of empty seats...
http://sportsnickel.com/2011/12/03/the-ten-stories-that-dont-and-do-matter-as-nba-season-nears/
dejavu
GOLD bitchez!
Got cancer? Take two aspirin and call me in a month. Problem solved. (nothing changes)
Definitely we could be headed for a big RISK ON phase. Unfortunately i was caught last time risk went OFF. Just hoping to get back to my balance sheet of 12 months ago.
still did not get it, why the fuck euro spiked?
Iran will stop oil to them and euro goes higher? makes no cense.
alog short squeeze....if short its just noise
Well, can't we just start talking about QE4 rumors now?
No need. We got QE infinity now. Basically, FED says I will print how much I want for as long as I want without any permission. That is what that inflation targeting means.
http://ca.finance.yahoo.com/news/market-too-bullish-why-pros-195452933.html
Ooohh, the sheeple may be catching on to this
Also, with Iran stopping oil to the EU - fun times up ahead.
Largest central banks now hold over $15 trillion in bloated, overpriced fictitious capital. The losses will be sent to the sponsoring governments.
http://www.wallstreetexaminer.com/blogs/winter/?p=4389
Its all noise the truth is in 3 months we will be below 1.26 eur usd mkts are no linear
Maybe, but I doubt it. The FED doesn't like the Euro below 1.30. Remember, these currencies are all falling.
They will soon ratify the ESM.
Then we will have the United Fucking -together leveraged over the head and the idiotic Germans will pay- States of Europe with an
unelected sovereign and all will be well.
That has changed.
With all due respect to the Tylers & all ZHers I must say the RISK-ON/RISK-OFF nomenclature truly misrepresents the issue. Due to the manilpulation of governments & their insolvent banks the facade of safety, ethics, & value are unreasonably skewed. The daily gambling that occurs should not be confused with investing...It is like watching a schizophrenic perform open heart surgery; moments of lucidity, compounded by intermittent crisis, worry, & lies - all with the working knowledge that in the end the operation will fail due to the fact that the circumstances are untenable...Keep the patient on the table with the perceived idea that the operation will succeed - however, those manipulating the situation perpetuate the lie allowing themselves to profit by extending the time line long enough to exploit it & prepare themselves - NOT THE PUBLIC - for the impending CRISIS - So technically, as we all know - IT IS RISK OFF situation that is puncuated by lying sociopaths in power...I challenge those more eloquent than I with finding the a better phrase...IMHO the use of the terms RISK ON/RISK OFF supports the lie which the Zero Hedge thesis refutes
neither europe nor america will ever derisk.
http://covert.mypressonline.com
Kyle Bass on when the shit is going to hit the fan: http://bit.ly/ywzqNI
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it is a good question, but I guess that it is real what you said about the Europe. We should solve the issue somehow. yacht charter turkey