It appears markets have re-converged in the last few days across asset classes as European credit markets have rallied to meet a modestly underperforming European equity market after quite significant drops in the former a week or so ago. In the US, equity futures have reconverged with CONTEXT [7](our proxy for broad risk assets) as Treasuries have weakened and FX carry has improved tone overnight while futures themselves have drifted sideways. Commodities have largely drifted also with a modest improvement in Copper and slow drift up in WTI (back over $107 now). For some perspective, GDP-weighted European Sovereign risk has improved 80bps from its Nov2011 wides (or around 23%) but remains over 200bps wide of Post March 2009 lows and over 500% higher still - back only to levels seen in August 2011. Consensus appears to be that a larger than expected LTRO is positive for risk assets with Equities and then Credit the main beneficiaries (with FX the least) and a notable divide between European traders and non-European traders with the former believing the EUR will strengthen vs USD and the latter not so much (more focused on carry trades). For now, Italian and Spanish sovereign yields are leaking higher but in general wait-and-see mode remains with anxiety high.
[8]
After a rather large drop two weeks ago, credit has recovered notably well (and stocks have lost ground) but the two asset classes are in general back in sync with the pre-NFP print levels - with perhaps modest underperformance by financials.
[9]
Broadly speaking risk assets did not follow US equity futures in the day session through Monday and Tuesday but overnight have started to converge upwards (more risk-on) as Treasuries have leaked higher in yield and FX carry pairs have pushed up. Oil's modest rally has also helped.
[10]
GDP-weighted European sovereign risk has improved post Thanksgiving (and most so since LTRO 1) but the improvement must be seen in perspective and remember that Italian and Spanish banks are loading up on this increasingly contagion prone sovereign debt.
Charts: Bloomberg