We have been warning of the bearish divergence in European credit markets all week and today saw that trend continue as the best-performers of the year-to-date become the biggest losers on the week. Financials and high-yield (crossover) credit have dramatically underperformed this week (with XOver +50bps touching 600bps once again) as credit overall trades considerably wider than before the NFP-print jump. Investment grade is wider but diverging a little today as decompression trades are laid back out and up-in-quality trades are reconsidered - and away from financials which have seen their senior unsecured credit spreads jump from under 190bps to almost 220bps on the week. Broad equity markets in Europe also saw their worst week of the year but are lagging the credit sell-off for now and sit (for context) right around the pre-NFP jump levels. Sovereigns were mixed on the week with the last couple of days seeing notable deterioration. Spanish spreads are +33bps, Italian spreads are -9bps on the week but are 25-30bps off their tights but it appears Portugal was the darling of the ECB this week as it managed an impressive 100bps compression (10Y now almost 500bps off its wides on 1/30) but this impressive tightening only gets the peripheral nation back to 1050bps (and mid-January levels - still triple the level of risk of a year ago).
In FX, JPY was stable as EUR weakness pulled USD stronger against all the other majors as it closed Europe under 1.32 - only at Tuesday's levels. The USD strength (and event risk concerns) have stumbled commodities though they bounced modestly into the close with Gold holding $1720 and WTI back above $98. 10Y Treasuries underperformed Bunds by around 6bps on the week but both rallied back notably overnight into the European close (leaving 30Y almost unch on the week).
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We noted the divergence in European financials credit and stocks earlier in the week and hope traders had the opportunity to capitalize on stocks playing catch up to that downside.
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European stocks (blue) are still outperforming (for now) as credit overall widened dramatically this week. Credit is now (red oval) much wider than pre-NFP levels (green oval) while stocks are holding that level.
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Spain and Italy notably underperformed today. Portugal had a great week - thank you ECB - but in general sovereign spreads (10Y) have remained in a narrow range this week - not extending their year-to-date gains.
Charts: Bloomberg