Market Snapshot: Europe Down Large But End-Tone Better In Credit
Credit markets opened extremely weak last night in Europe, underperforming equities, and continued to slide lower for most of the day. The interesting divergence that appeared was equities underperforming credit all day long which provided some modest bid to credit as we closed and reflects what we have been discussing recently - that equities had yet to catch up to credit's perspective of the world.
Notice in the chart the blue line (broad European equity index) closes at its lows while credit (Main, XOver, and Senior Financials) all pulled off their wides. While still a very ugly day overall (with multiple standard deviation moves everywhere), chatter was that some Senior-sub arb was in play and credit vs equity trades were active towards the end (both of which will tend to put technical buying pressure into credit). Notably, it was not just financials hurting the broad indices - we saw non-financials widen considerably as the macro data and credit transmission channels team up to slow growth expectations.
FX markets just kept going with USD strength and EUR weakness dominating but we note that JPY is strengthening once again against the USD throughout the European day - more carry unwind/repatriation? And remember we pointed out overnight that Japan's sovereign CDS jumped significantly overnight (as did much of Asia).
The USD's gain of over 1% overnight did nothing for commodities and PMs which just kept on dropping and with weak manufacturing data in China and Europe, oil and copper got some extra juice to drop. Copper is now -12% this week alone and while gold is down over 4%, it is outperforming and in the face of a 2.5% rise in the USD.
Markets in the US are pushing at their lows as Europe closes with credit dramatically wider, net-selling in HY bonds, and single-name CDS getting squeezed wider in financials (as we see curves flatten even as bond managers shorten duration net-buying far more short-end than long-end debt).
All-in-all things feel very weak out there with sovereigns cracking their all-time wides and even IG credit in Europe as wide as it was at the peak of the financial crisis in 2008/9. Equities remain well above levels appropriate to the credit market's perspective and downside risk remains the bigger threat in a vicious circle of capital reduction, counterparty risk management, and illiquidity.
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