European financials are under significant pressure today and that is dragging down the rest of the broad markets. The selling appears to be driven by three main factors: 1) the LTRO Stigma has surged back to record wides (after a brief lull into LTRO2); 2) rather amazingly investors are starting to get concerned that the Greek PSI deal may not happen; and 3) weak macro data. Obviously both are no surprise to readers and the canaries have been fluttering for a few weeks on this. Equity markets continue to hold onto hope as they remain broad outperformers but in a different tone than the last credit-led sell-off, European equities are dropping much more in sync today. Sovereign spreads and yields are leaking higher with Spain and Italy underperforming (followed closely by France) as perhaps all the self-serving Italian and Spanish carry-trade-funding banks have run out of ammo (or will to extend) as the Greek basis package inches ever closer to Par (implying absolute inevitability of an imminent credit event). Notably Sov CDS are underperforming (as we pointed out last week they are potentially a less manipulated and cleaner indication of risk appetite than bonds for now). It would appear that all the belief that insolvency tail risk and contagion had been deferred or ring-fenced by yet another liquidity flush may have simply forced European banks into an Oliver-Twist-style environment - "May we have some more?" as we now start top hear the mutually assured destruction chatter surrounding the implications of a failed PSI deal - where have these people been for the last 3 months?
The Stigma spread between LTRO-laden banks and non-LTRO-laden banks has surged to near record levels once again...
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and overall credit markets are once again signaling concerns though this time, equities are following them down (though less aggressively at the aggregate for now)...
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and while credit broadly remains the underperformer (with senior financials - red - the newly subordinated laggard), stocks (blue) are starting to follow in a much higher beta way this time...
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and while sovereign bond spreads (and yields) are pushing higher for the second day in a row (notable in itself), it is the CDS market that is widening more (as the basis widens) and we remind readers of our discussion last week that watching Italian and Spanish CDS is perhaps a cleaner way of gauging reality than their ECB/LTRO-carry-funded bond curve self-dealing...
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All-in-all, not a pretty picture as EURUSD pushes lower, Treasuries are rallying and commodities are tumbling.
Charts: Bloomberg