One Explanation For Today's Irrational Exuberance

Tyler Durden's picture

Since the EU-Summit, US and European equity markets have (in general) outperformed. From being in sync before the Summit, US equities went into the weekend with a sell-off, which then spurred a short-squeeze push as the S&P 500 was over-exuberant (relative to European equities) on the way up at the start of last week. That cracked back to reality at the end of last week - squeezing the over-levered longs to a significant underperformance relative to European equities. It would appear that in the last 24 hours, US equities are now rallying back to that European 'surreality'. Surreal because European stocks remain dramatically exuberant relative to European (peripheral spreads unch and AAA massively bid) and US (Treasuries bid) bonds and European corporate and financial credit. As we stand, the S&P 500 has retraced back to Europe's 'fair' perspective.

Europe's BE 500 (S&P 500 Equivalent) versus the S&P 500 since the EU Summit...

 

and Europe's equity market remain in a world of its own relative to credit markets...

VIX has overshot this equity strength but is leaking back higher now (inverted below)...

Certainly seems like it's easy to use the infinitely sellable vol market to ramp equities to where 'they' need them - as the S&P managed to scramble back close to unch for the month (and week).

Charts: Bloomberg