While the ubiquitous pre-European close smash reversal in EURUSD (up if day-down and down if day-up) was largely ignored by risk markets today (as ES - the e-mini S&P 500 futures contract - did not charge higher and in fact rejected its VWAP three times), some cracks in the wondrously self-fulfilling exuberance that is European's solved crisis are appearing. For the first day in a long time (year to date on our data), European stocks significantly diverged (negatively) from credit markets today. While EURUSD is up near 1.3175 (those EUR shorts still feeling squeezed into a newsy weekend), only Senior financials and the investment grade credit index rallied today, while the higher beta (and better proxy for risk appetite) Crossover and Subordinated financial credit index were unchanged to modestly weaker today (significantly underperforming their less risky peers). European financial stocks have dropped since late yesterday - extending losses today - ending the week up but basically unch from the opening levels on Monday. High visibility sovereigns had a good week (Spain, Italy, Belgium) but the rest were practically unchanged and Portugal blew wider (+67bps on 10Y versus Bunds, +138bps on 5Y spread, and now over 430bps wider in the last two weeks as 5Y bond yields broke to 19% today). The Greek CDS-Cash basis package price has dropped again which we see indicating a desperation among banks to offload their GGBs and needing to cut the package price to entice Hedgies to pick it up (and of course some profit-taking/unwinds perhaps). All-in-all, Europe's euphoric performance has started to stall as perhaps the reality of unemployment and crisis in Europe combine again with US's GDP miss to bring recoupling and reinforcement back.
[12]
European stocks (blue) dramatically underperformed credit. The up-in-quality rotation (and senior-sub decompression) trade is perhaps making a comeback as higher beta credit (and equity) starts to lag...
[13]
...as European financials (above) stock prices have dropped on higher volume in the last day or so (though off the week's lows obviously) but it was certainly not more of the same up, up, and away this week.
[14]
US equities reacted to this downturn too - and did not follow the EURUSD risk-on ramp (shown by the dark blue line above) and instead turned back down (at VWAP - light blue line) as Europe closed. With EURUSD near 1.32, ES is not following it, which we suspect is supported by the JPY strength (as its not EURUSD but EURJPY that is more critical in terms of correlation).
[15]
Spot the odd one out in European sovereigns.
[16]
Portugal has underperformed this week as it is interesting that the most headline-worthy names have outperformed - almost as if someone needed to maintain the optics for just one more week. Portuguese 5Y spread to Bunds is 436bps higher in the last two weeks.
[17]
And finally the cost of the Greek CDS-Bond basis package. It has fallen from 93% to under 88% in the past week. This drop has been mostly driven by a reduction in protection costs (and a small positive in GGB bond prices). While there are many different ways to interpret this cost (which will go to 100 if the CDS is triggered theoretically), we believe that profit-taking on the basis package was unlikely (though fair given the rising uncertainty and proximity of a decision) but as we heard last time we saw a dip in the cost, banks are willing to cheapen up the package to be able to offload larger volumes of GGBs from their books (and hoping to clean up their CDS exposure in the market - admittedly at a loss but a smaller bid-offer than bonds and not the kind of bidless liquidity that would happen if they just dumped GGBs onto the market). At around 87, risk-reward is attractive for hedgies (and gives them skin in the PSI game) but we suspect with the deal or no deal so close, they would prefer to watch from afar than jump in now.
Charts: Bloomberg