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European Equity And Credit A World Apart

Submitted by Tyler Durden on 11/28/2011 09:56 -0400

European equity markets began to rally around 830ET on Friday. Credit bottomed around 1130ET Friday with XOver and Sub financials the worst performers. Since then, equities have soared - almost entirely recovering last week's loss on the back of officially denied bazookas among other failed rumors. Corporate credit markets are outperforming financials (which are only back to Thursday levels) but the credit markets in general are massively less sanguine than the over-excited equity market for now.

The US equity market is actually supported by a broad basket of risk assets, driven considerably by the rather dramatic weakness in TSY (and rise in 2s10s30s) seen since the European close on Friday (30Y is 21bps higher in yield from Wednesday's close). AUDJPY is also showing up as a major driver of the underlying strength and while the calibration showed weak correlation, since Sunday night started trading, ES and CONTEXT have tracked extremely tightly (suggesting the self-congratulatory risk-on mode is in full swing for now). Oil's weakness and potentially a ceiling to 2s10s30s would be our best guess as catalysts to stall this squeeze (and we would watch HYG at the open for any dramatic outperformance after last week's constant underperformance).