Following yesterday's extravaganza in European credit markets, which saw XOver (European high-yield credit) surge to highs year-to-date (wiping out a week's worth of leaking wider in one fell swoop), today's open suggested some follow-through but as macro data combined with France downgrade rumors (denied rapidly) sovereign and corporate credit markets sold off quite rapidly into the close. Interestingly, financials (senior and sub debt) managed to hold gains from yesterday's close as XOver and Main (Europe's investment grade credit index) along with the broad stock market lost ground to close near their lows (though well off yesterday's open still). EURUSD (holding under 1.27 at the EUR close) weakened fairly consistently after Spanish industrial output and German GDP did nothing to inspire and while sovereign spreads (Spanish and Italian mostly) were outperforming, as the French rumors hit, they sold off rapidly (France and Italy back to unchanged). As usual into the close there was a modest risk rally and sovereign spreads leaked modestly tighter (by around 6-9bps) with France underperforming but we did not see that bounce in corporate credit. The weakness in 'cheap-hedge' investment grade credit suggests risk appetite is not returning and decompression trades are back in vogue after yesterday's snap and perhaps a growing realization that no PSI agreement is looming anytime soon.
Investment grade credit underperformed and as a cheap hedge suggests some derisking though we note that the Main index remains notably rich to intrinsics (i.e. trades at a significantly tight spread to its underlying component-based fair-value). XOver's move yesterday was also not accompanied by a dramatic move in the underlying names and it looks like today's widening was to some extent index arbitrage to push the index closer to its fair-value. The amount of sell-side propositions to place credit option straddles - to 'monetize a muddle-through sideways market' - may also be to blame here (especially yesterday) as the negative gamma (selling into weakness and buying into strength to manage hedges) has likely built up (and we hate to say it but 'capitulated' yesterday on such a large gappy move). This would explain the index-only moves to more extent as the US-EU relative-value trades and XOver-Main relative value trades moved rapidly also but underlying names did not so much.
[7]
European sovereigns did well out of the gate - extending yesterday's moves but ran out of steam quickly. They began to leak back on weak data and selling accelerated as US markets opened and French downgrade rumors hit. France underperformed but all managed small gains on the day (some gappiness suggests non-economical buyers of last resort were in action today also).
[8]
EURUSD moved back into the red (USD stronger on the week) as cable (GBP) notably underperformed. EURUSD touched the week's low print from Sunday night and bounced a little at the Europe close but is holding under 1.27 for now as AUD and CAD are outperforming USD on the week.
EUR selling and US Treasury buying are coinciding significantly so far this morning.
Charts: Bloomberg