Credit markets in Europe remain significant underperformers relative to equities this week, despite some short-covering yesterday that narrowed the gap. Global Financial Systemic Risk is rising again - dramatically. It seemed that the dramatic shift from early to mid-week was enough to scare some action back into the market and we can't help but feel that the rallies in Spanish and Italian govvies (on what was very likely thin trading) was all central banks, all the time. Today saw stocks rally in Europe to new post-NFP highs while credit leaked wider off its open and closed on a weak tone into the US long-weekend.
As BNP pointed out this week, the 7 day run wider in European financial credit was one of the largest on record at around 57bps (versus 64bps record) and so some pullback from that run was likely but the lack of follow-through today suggests this was books getting flatter into a decision/headline-heavy weekend as opposed to significant rerisking. EURUSD trod water around 1.3125/50 but AUD weakness spurred a much more risk-off attitude in FX that was not evident in stocks (yet). Treasuries were inching lower in yield as we moved into the European close after extending yesterday losses earlier on (up 2-6bps on the week). European sovereigns ended mixed with most wider since the NFP-pring Friday (Spain +27bps spread to bunds) while Italy managed to recover (-11bps) and Portugal is notably tighter. This week saw very sideways action dominated by the sell-off and rally reversal in Spain and Italy's pivot securities. As Europe closes, commodities (ex-Oil) are selling off rapidly with Copper the week's big loser -4%, Silver next - underperforming USD strength, and Gold just in the red on the week at $1720.
The end of the week felt much more like covering to flat than any aggressive re- or de-risking which seems appropriate given the rising risk of binary events and an inability to hedge those jumps.
[9]
Our index of the 30 most systemically important global financials (as per the FSB) is rising fast again as European/Greek concerns rise. Having retraced to the peak levels from mid 2010, we have rapidly risen in the last week - even as stocks have rallied.
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Aside from the huge reversal day in Thursday - the week was weak in credit and strong in stocks (again). Today was flat in credit and up in stocks.
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US and European financial credit markets have been weak as contagion risk and systemic risk rises. Europe's bounce yesterday was notable but saw no follow-through today and after an almost record seven-day run of around 57bps in European financials, it is perhaps no surprise we saw some covering or squaring of positions. Basis traders have been busy also (buying CDS protection and buying bonds) to lock in this difference, which has supported cash markets, but does little to help overall risk tolerance.
[12]
The other notable change here is that the index rally of the last day or two was not at all seen in underlying name CDS (the skew has widened massively) - i.e. while the index value improved, the value of the portfolio it is based on in fact weakened - which suggests a rotation from index overlays (quick liquid hedge) to more idiosyncratic (LTRO? Greek-exposed?) hedges. From Wednesday's close with the index and intrinsics at 242, the index has rallied to 222bps while intrinsics has weakened to 248bps!
[13]
Away from credit and equity, FX, rate, and commodity markets were choppy with the latter the most risk-averse this week - with Oil the obvious exception (up over 4% at around $103).
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It would seem that amid all the noise, there was some signal - commodities, FX carry, and Credit were not happy while Stocks seemed more noise and headline-driven (as did EUR specifically) and with Global Financial Systemic Risk rising again - we suspect that government intervention will remain the only thing to hold this back.
Charts: Bloomberg