As the EUR trades at its lows of the day (having retraced over 60% of the Euro-Summit rally, we wonder how long before the broad European equity markets will take to fill the gap from that wondrous liquidating day. Equities are underperforming credit so far this morning but it is very clear that hedgers/shorts are back in lower cost credit positions as European sovereigns leak wider in yield (cash and CDS). We also note that EFSF is underperforming Bunds (by around 7bps so far this morning) making us wait for the Barroso-Van-Rompuy 'We're gonna need a bigger boat' speech.
The Bloomberg 500 Index perilously close to starting the EFSF gap fill. The EFSF trades 127bps cheap to Bunds, a seemingly critical level given the chart below, and based on Moody's comments overnight on the Euro-Summit's negative implications for AAA-rated European nations, we are hardly surprised. Spain and Italy are also seeing their bonds leak significantly higher in yields this morning - hardly reassuring for the uber-solution that was in place last week.
The EUR itself, perhaps a little shell-shocked at Azumi's revenge last night, has now retraced 61.8% of the huge swing higher from last week.
And while equities are underperforming credit markets (as evident in the chart below), it is very clear that the cheaper (lower cost/carry) hedges are underperforming the higher-beta (expensive carry) positions for now as last week's nerve-jangling rip-fest is still ripe in the minds of many credit traders.
Interestingly, given the massive disconnect between EURJPY (and other JPY crosses) last night and a correlation-driven expectation for where ES would trade, the retracement in JPY has dragged the 'model' price much more in line with the lower (and falling) ES...it seems risk-off (as we discussed last night) is driving not being-driven.