We noted earlier the initial positive reaction to Trichet's comments followed by a more reasoned down-draft. Subordinated financial credit underperformed in that sell-off and remained that way for the rest of the day even as the EUR managed to rip-snorting rally back above 1.34 on confusing comments from Juncker on EFSF leveraging (contra his earlier in the week comments) and Merkel's noting bank recaps may be necessary. Three main things stand out from the Europe session: senior and more-so subordinated financial credit underperformed, EUR dipped-and-ripped as anti-POMO started in the US, and gold remains subdued while silver, oil, and copper hold and extend gains. Back in the real-world, Dexia (-44% in the last few days) will remain halted til 10/10 and Belgian spreads and yield curve are increasing and flattening rapidly.
The light blue line is sub debt on EU financials (inverted) suggesting senior-sub decompression trades starting to laid back out - as recaps (of whatever sort) may force problems down the capital structure (but why are equities so happy? - take a look at Dexia to know what a recap really means - not a loan!!).
FX markets were very excitable in all the majors except JPY as AUD has a strong showing along with the EUR but cable loses ground as QExxx chatter is reignited. Silver is holding on to 5.5% gains this week with copper back from the dead +3% from Friday as oil and gold fight it out around 1.5% higher on the week - even as the USD has only lost 0.25%.
In the US, the anti-POMO came and went and the 2s10s30s butterfly rose notably as the 7-10Y buckets of the TSY curve have significantly underperformed this week. Net buying resumed in IG and HY corporate bonds but HY is lagging equity's performance a little so far. Once again MS, BAC, GS, and JPM top the most actives with GS and JPM most notably active in dealer-to-dealer trades as MS and GS see marginally more net-selling from managers.
On a short-term basis, CONTEXT is implying that broad risk assets are not following the excitement in stocks as aggressively today. To provide some more conviction for that view, on a longer term basis, this last leg up in ES has pushed it well beyond broad risk asset's CONTEXT. On the way down, ES was leading risk - which is unusual though not unique - but during rallies we very seldom see ES stay above and hold above CONTEXT for long - we will watch today for reactions in TSY 2s10s30s and FX carry as to next steps and conviction but for now it feels like ES is a little overdone (as if 82pts in 48 hours is not enough of a signal).