For the third week in a row, European equity and credit markets have remained range-bound. Equities broadly ended the week in the green with the BE500 (Bloomberg's broad S&P 500-equivalent for Europe) ending near the top of the recent range - around the pre-NFP levels from 4/5. Spain and Italy have seen improvements this week in their equity indices but they remain down notably on the month and perhaps surprisingly only the UK's FTSE 100 is in the green for the month. Credit is considerably more dispersed but also green close-to-close on the week after a strong finish today (as the dismal data started rumors of more ECB easing and QE3 lifts). Stocks and high-beta crossover credit outperformed in the liquidity rush but subordinated financials lagged on the week. Critically though, while anchoring bias might make us all feel joyous in the last few days of recovery, we remain significantly red on the month across all risk asset classes in Europe. Sovereigns followed the same path as equities and credit - with another range-bound rotation up better on bill auction success and worse on bond auction failure but as with equities/credit today's exuberance lifted them to the middle of the recent range - well off the best levels of the last few weeks. Most notably, Spanish and Italian 10Y bond spreads are over 60bps wider in April and continue to trade in a two-steps-wider-one-step-tighter rotation intra-week. Portugal is the big winner on the week (and month) when it comes to bond spreads - which are now back to mid-September levels. However - as we have tried to explain before - the massive cheapness of Portuguese bonds relative to CDS (the so-called basis) has just been too tempting and grabbing this 'risk-free' carry has provided some bid to a notably illiquid Portuguese bond market and crushed the differential between bonds and CDS. The point being - be careful in reading too much into Portuguese bond improvements as it is much more a technical arbitrage move than real money flowing into this restructuring prone nation.
Spain and Italy have seen improvements this week in their equity indices but they remain down notably on the month and perhaps surprisingly only the UK's FTSE 100 is in the green for the month...
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The Spanish equity index (IBEX) has become increasingly bipolar and looks a lot like the S&P 500 did during the summer chaos last year with +/- 2 sigma swings day after day after day...
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And while this week saw stocks (broadly - blue) move to the top of the recent range, they remain notably weaker on the month. Credit also is more dispersed (with financials underperforming - especially subordinated financials) and considerably wider this month...
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and sovereigns also have been notably wider on the month (especially Spain and Italy)...
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and as is clear from the above chart, Portugal looks like a big winner, but as is clear from the chart below, this compression in Portuguese bond spreads is convergence to CDS levels thanks to basis traders as the CDS-bond basis has compressed to 8 month tights now. The narrower the basis becomes, the less technical demand there will be for these illiquid Portuguese bonds so be careful extrapolating too much...
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Charts: Bloomberg