European Equity And Credit Diverging As Sovereigns Implode

Tyler Durden's picture

European sovereign credit curves are bear flattening (inverting wider) in almost all cases as short-dated yields breaks to new records in several names. At the same time, European credit is breaking to new lows in Corporates and financials with Subordinated financials underperforming. Somewhat strangely - though not exactly surprising given the market's behavior in the last few weeks - European equities are holding up as they ignore the reality priced into credit. It seems equities see the light at the end of the tunnel, but credit knows its an oncoming train. US markets are in sync with the broad risk-asset basket (CONTEXT) for now but correlations are tending to be much lower than on average so far.


Total dislocation in credit vs equity this morning. Of course the safer trade is convergence (long credit, short stocks) but the breadth of weakness in credit suggests some confidence in a negative bias.

As Sovereign curves are once again deteriorating as EURUSD surged down toward 1.32 but stalled early and is pulling back to 1.3250 now. Oil, Gold, and Silver are still selling off but Gold less so at the moment.


Charts: Bloomberg

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Captain Benny's picture

The EURUSD is looking pretty ugly technically.  I'm considering re-adding my ES shorts that I took off on Wednesday.

Will someone step in and do something inflationary to prop up world equities markets? *Cough* Fed *Cough* Probably not yet, still not enough blood in the streets.

Trade for fiat, convert to physical, wait.

knight99's picture

If and when we break the October lows and 1.30 we could see some massive selling pressure on all things not US dollar.

Captain Benny's picture

I agree.  I'm hesitant for a bounce, but I see no reason for one other than to sucker more squid-loving longs into the EURUSD.  If that level fails to hold, we're probably see the S&P500 head toward 900 pretty quick.

Sudden Debt's picture

that would mess up the yearly inflation numbers. Januari 2, sound about the moment to start propelling everything up.


slaughterer's picture

You have to be wagering on a test of 1120 if you are considering opening a new ES short at 1160.   In my opinion to much risk for too little reward: short stops will be run through quickly on slightest good data/rumor.  Do not expect a 2008 plunge into December: financials are already at their December 2008 valuations.  Stay in cash, accumulate gold.   

Captain Benny's picture

Great warning.  I think we see a huge rally on the stupidest of news in the next week, but I can't imagine any news propping up the market other than a major inflationary intervention by the ECB or Fed.  It would be political suicide for the Fed to do it right now (today), but things might get far worse and they might find the support somewhere under some kind of scenario.

China seems entirely focused on diversification at this point and they might see it as a temporary stabilizer to toss some money around after everyone else is bleeding out... The logic being that they want to hold the system together a little longer in order to acquire more resources across the globe.

So I see China, the ECB, or the Fed as the only options to end this.  Two options are EXTREMELY inflationary and one possibly not...

The Fed is begging for inflation.  Will they work with Europe to ensure inflation?  Probably...

fonzanoon's picture

Financials are at their lows and it takes balls to stay short them here but I am. I think the only rumor that can come along this time to turn things around is Ben announcing LSAP. It's going to happen. But not yet. Plus I would like to tell my grandkids I helped end BAC.

Captain Benny's picture

It may be many generations before the ending of the current banking system will be viewed as patriotic.  Your grandkids may always view you as the "terrorist" who contributed to the social pain we all must bare as billions of people stretch this planet's resources so thin that many must die to restore the balance with nature and what this planet can handle.

fonzanoon's picture

Fine my great great grandkids then.

fonzanoon's picture

Has it ever occured to you that one asshole shorting financials may not be doing as much harm as millions of broke assholes having 5 kids? Maybe just maybe the environment has to place some checks and balances when stupid people decide not to? It's painful, but people don't seem to like consequences anymore. Nature still sorts it out.

LawsofPhysics's picture

The elites are counting on precisely this. By "elite" I am talking about the families on the other side of the debt (collecting interest - money for nothing).  This is why China is also not a threat and is not quite ready to have the world's reserve currency as it would have to let the currency float and be open to "free" market speculation etc. Look, the banking class is in control of all the Armies around the world and the end game is clear - everyone works for Chinese wages or else.  China is a communist country and Russia was socialist (now just flat out corrupt) in those countries simply substitute the word "banker" with "government" and you have the same end, relatively few controling the fate of masses.  Getting our poutry products in to both country requires many bribes.  It is what it is.


Again, the end game is clear, PARITY the world over, many countries simply coming at it from different directions, the relatively few elite in China, Russia, India, and Brazil (like everywhere else)  are all too happy to sit back and let America and Europe implode.  And why not, this will simply lead to another great buying opportuinity after Nature (starvation/riots/war) has sorted it all out.  The "growth" meme has held for 2000+ years, you really think people will suddenly recognize this wonderful but finite world for what it is NOW?

Good luck.

fonzanoon's picture

Your analysis is great but when I threw together the few crumbs I had and shorted financials I interrupted nature apparently.

LawsofPhysics's picture

Think about it this way, YOU are part of Nature, thanks for doing your part.

fonzanoon's picture

This whole thread has shredded my sense of self. I am heading to BAC at lunch to open a christmas club account. Hopefully the interest they don't pay me will fall into the hands of someone needy and I will have reversed any bad karma I have inflicted.

GOSPLAN HERO's picture

Silver is cheap as is gold ... get it.

Massive inflation is forthcoming.


slaughterer's picture

This dislocation in credit/equity usually precedes some BS rumor of QE.  

Canucklehead's picture

With the european currencies dropping it looks like the currency of choice going forward is the US dollar:

That said, I suspect european equities are going to be priced relative to similar US equities; hence they will hold up better than bonds.

Big Ben might manage the european transition to a USD based global currency...

Dr. Engali's picture

That's about as ugly as a chart can get. What I want to know is when the euro blows up will the dollar rally and PMs fall? I'm hoping that's the way it plays out. I want to add to PM positions before big Ben turns the printers on to ludicrous speed.

knukles's picture

Hey Doc!  That prior thread where I referenced the (highly offensive and unamusing) Font of all things Delicious and Bright, MDB...  Of course I was being sarcastic. 


Dr. Engali's picture

I figured you were but some times you just can't tell. And that article from an otherwise good contributor made me mad.

Mark Wilson's picture

"Ludicrous speed" lol!


Mel Brooks is a genius. :)

knukles's picture

Standard Equity Market Behavior.

As if the equity managers are the last to be told or most likely the last to believe their blessed stocks that go up forever at some unbelievable rate in perpetutiy would dare fall.  You all know the homilies they use to justify their positions.  If not, tune into CNBS sometime; I take no personal responsibility for your mental, spiritual or monetary wel being.

Credit markets are the first harbingers, the canaries in the coal mine for the reason that they are where the problems first surface.  Insolvency, illiquidity, credit risk, all show up in credit, by definition, first.

KNiCKER's picture


knukles's picture

No, no, no, my swollen nuts are breathing?

css1971's picture

Man muss bezahlen, eins weg oder andere.


buzlightening's picture

goon-a be a very cold winter for all globally.  We need some former depressionary promises as a chicken in every pot or a eurobond in every holiday stocking.  Gettin plain fugly with nothing but chaos on the holdiay list. 

President Palin's picture

I thought Europe was fixed, just like the USSA?

GeneMarchbanks's picture

Oh it's 'fixed' all right. No balls, hence you get Merkozy.

Sudden Debt's picture

By "fixed" you mean had it's BALLS CUT OFF right?


KNiCKER's picture

"You cannot solve problems out of the same mindset from where the problems have been created"

A. Einstein


Long live the technocrats... They will solve it all!


Tsar Pointless's picture

Seems to me that the "bond vigilantes" and credit ratings agencies are punishing the addicts (sovereign nations) while rewarding - or at the very least ignoring - the pushers (the banks).

This is totally unacceptable and amounts to treason when being committed by banks headquartered in a nation under attack. This is financial terrorism, but nobody has the balls to say it in the CMSM (corporate mainstream media for you acronym-impaired).

If bank buildings wore burkas, we'd be bombing the living shit out of them as I type this comment.

Ned Zeppelin's picture

I have held firm to my belief that the ECB will print, but that depends on Germany yielding.  The new themes popping up are "Treaty amendments" and "yielding sovereignty," all political changes towards the unification of the Eurozone, whereby Germany of course will end up running the Eurozone show.  So it may be that they are "negotiating" and thus holding their ground on a "go ahead" to the ECB for some level of printing that is enough to shock the bond vigilantes into a defensive mode.  But the obstacles required to enact these political changes are so daunting, not unlike a Constitutional amendment here in the US, such that I don't see how that could happen except under the most exigent of circumstances.  On the other hand, the powerful banksters are looking for any route to printing, and the politics may follow as the elected politicians do their masters' bidding. Quite a test of democratic rule.

My crystal ball fails me.  We've seen this thing buoyed by the rumor du jour for months, but at this point, with the ESFS contraption now done, and Merkel's pronouncements that Eurobonds are a no go, what sort of rumor can counteract the current run on the bonds of the Eurozone?

Short credit, short stocks, short Euro, long USD indeed may be the formula.

blindman's picture

Lake Plac1d, New York, August, 1914.
"Recent events have shown the inefficiency of this system. In spite of unwise provocation the government banks of Europe would not and could not have made a stand against us (as they have done during these past few months by raising their rates of discount and by discriminating against our so-called finance paper) had we been able to send our legitimate commercial paper instead of forcing the banks and bankers to draw their own bills. These bills, it is true, indirectly help commerce, for a bank which requires money in order to accommodate its merchant customers will call its stock-exchange loans, while bills drawn against stock-exchange collateral will in turn provide the money that has thus been called.

But such bills must inevitably bear a financial character, and will not be regarded so favorably as commercial paper would be. Moreover, since the drawers and, to an even greater extent, the European acceptors, are comparatively few, the European banks must at times feel that they are getting too large an amount of paper drawn on and indorsed by the same firms. As these bills, drawn, as the case may be, in pounds, francs, or marks, sell normally at the same rate of private discount as all the other long bills in the country, the European banks find no particular inducement to purchase them. When, therefore, there is an excessive amount of these American bills offered, the consequence is discrimination, and, what is worst;—owing to the financial aspect of the bills—a feeling of uneasiness and distrust.

If instead of this unfortunate method of financing we could offer American paper drawn in dollars, showing its commercial origin and indorsed by and drawn on American banks or banking firms, we should vastly multiply the avenues leading into the portfolios of the European banks, and our bills would be well spread instead of going into a few channels which can so easily be closed. We should create a new and most powerful medium of international exchange—a new defense against gold shipments. This is no visionary theory. In view of the fact that a great many millions of even Russian bills are constantly held by French, English, and German banks, institutions and capitalists, there is no reason whatsoever to doubt that these same avenues could be readily opened to American paper.

In order thus to make our paper part and parcel of the means of the world's international exchange, it needs, however, as a preliminary condition, to become the foundation on which our own financial edifice is erected. It must always have a ready home market, where it can be rediscounted at any moment. This is insured in nearly every country of the world claiming a modern financial organization, by the existence of some kind of a central bank, ready at all times to rediscount the legitimate paper of the general banks. Not only England, France, and Germany have adopted such a system, but all the minor European states as well—and even reactionary Russia —have gradually accepted it. In fact, Japan without such an organization could not have weathered the storm through which she has recently passed, and could not have achieved the commercial success which she now enjoys.

Our methods are just the reverse of the European system.

michaelsmith_9's picture

The technicals on the charts do not look good.  A short term retracement seems to be underway for the SPX and DX as they continue to move inversely to each other.  The DX continues to remain in a very bullish formation.  The chart technicals are available here.