The moment BTPs broke above 500bps over Bunds this morning, it was clear that the ECB was in buying (and confirmed by desk chatter). Early in the day, European corporate, financial, and sovereign credit markets were in quite positive territory with the former at highs of the year. As downgrade rumors broke, and then were exacerbated by the increasing realization that Greek PSI is not going to happen, sovereigns broke wider rapidly and corporates and financials fell off a cliff (their biggest drop of the year so far) with XOver (the European high-yield credit index) widening 30bps almost instantly. EURUSD took out recent lows trading back to 1.2624, its lowest since August 2010 and EFSF (the much-heralded firewall) widened 9bps off its tights. The last hour or so of trading was dominated by improvements in BTPs and OATs as the SMP went to work and this provided some relief across all assets leaving European stocks at day's highs and modestly lower (after nearing the lows of the year so far earlier), non-sovereign credit marginally wider but sovereigns (Belgium, Spain, and Austria worst) still decently wider. While the impact of the downgrades on EFSF's structure and Germany's willingness to shoulder even more implicit guarantees is critical, we wonder if the PSI talks breakdown is the more important driver as investors face yet another a-ha moment and just as when the USA was downgraded, that the impossible may actually be possible (disorderly Greek default). In the US, ES (the e-mini S&P 500 futures contract) has also rallied nicely off the earlier lows but is holding at VWAP (and is in line with broad risk drivers for now).
[5]
European stocks (blue) are underperforming credit now but the steep covering into the close saved the day from being a total disaster. XOver's squeeze tighter (higher in the chart) was painful but gapped wider today as downgrades and PSI talk hit.
[6]
The USD (DXY) pulled back to its highs of earlier in the week (as EUR pulled off of 16 month lows to end the European trading week -0.24% (not exactly terrible) but most notably 1.5% weaker than its earlier highs this morning. This is a rapid rise for a major that has such high short-interest and suggests the argument for a squeeze is indeed being dominated by unlevered real money exiting. SEK's move to biggest loser was also notable.
[7]
BTP buying saved the day as the ECB was clearly in action. Most sovs were wider and EFSF ended over 9bps wider from its tights.
Charts: Bloomberg