The New Year has ushered in a new pattern for the market - or perhaps has clarified an old one. The last 3 days has seen European credit markets notably underperform equity markets but stage a significant rally around the equity close each day. This rally then flops into US markets. Today was no different from yesterday - EURUSD leaked lower (holding under 1.28 here) all through the European day session - the question is whether we will see the same stability we saw during yesterday's US afternoon session in FX which will enable the equity strength to hold. We suspect not given that broad risk assets (CONTEXT) has notably not participated in the equity markets pull higher so far. At the same time as Europe closed, with financials massively underperforming, US financials were breaking out as XLF went green and BofA broke above $6. Volumes are above yesterday but below Tuesday for this time of day - still notably low on a medium-term basis. TSYs have been very volatile this morning but European sovereigns have been on a one-way path wider all day - closing near their wides. Commodities are lower (USD strength) but Gold is holding up relatively best for now - well above $1600.
[8]
The credit market is trending wider overall for the new year while stocks broadly are still higher (despite a significant selloff in the EUR). The orange ovals show the period around the EOD for European stocks and the bounce we have seen 3 days in a row - that has been faded each time.
[9]
ES (the e-mini S&P 500 futures contract) bumped up against VWAP a few times this morning and sold off (suggesting institutional sell orders were around) but gathered momentum to cross VWAP (light blue) as thge European close rally monkey appeared. At the same time BAC broke $6 and XLF went green for the day - so all is well. CONTEXT [10](dark blue) is rising here but is considerably unimpressed with the ES rally so far.
[11]
European sovereign spreads leaked wider all day. France ended 10bps wider (just off its worst spread levels over 150bps and 50% wider in the last week). Belgium and Spain (followed closely by Italy) were all very weak with Italy back over 7% yields and 520bps spread to Bunds in 10Y.
[12]
EURUSD is holding under 1.28 for now - following a very similar pattern from yesterday. Commodities have leaked lower but are coming back some now with Gold back around $1610 and Oil trying for $103 again.
[13]
The question of whether this Europe EOD rally will hold is tough but credit and broad risk assets say no for now - and we are seeing larger than average trade size into this rally - suggesting larger traders setting up for some downside.
Charts: Bloomberg