Things are getting a little 'strange' in Europe. European equity markets (and voatility) have disconnected from the reality of European corporate, financial, and sovereign credit. As the massive bifurcation in sovereign yields continues - with Spain near record-highs and Swiss/German at record-lows - equities are still significantly higher post the EU-Summit (and vol massively so) as credit of any kind is dramatically wider. Specifically, 1) Europe's broad equity index is massively outperforming credit post EU Summit; 2) Europe's broad equity index Vol is majorly disconnected from XOver credit; and, 3) Europe's broad equity index is in-line with GDP-weighted sovereign risk BUT dramatically dislocated from Italian and Spanish risk (that is reflective of the core of the stress). Just as we have seen in the US, the method of choice for 'pumping hope' into equity market valuations is through the levered selling of volatility - it seems some-one/-thing with very deep pockets is getting awfully brave as Europe's VIX drops to near pre-crisis levels (and its steepest in months as short-term complacency surges).
1) Europe's broad equity index is massively outperforming credit post EU Summit;
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2) Europe's broad equity index volatility is majorly disconnected from XOver credit;
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3) Europe's broad equity index is in-line with GDP-weighted sovereign risk BUT dramatically dislocated from the ITA/SPA risk that in general means problems
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4) Selling short-dated vol seems to be the preferred method in the US and Europe as volatility curves steepen up once again to near record steeps...
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It seems complacency is once again at epic levels in equity markets but not so much in credit as the reality of haircuts, subordination, and recession appear more realistically priced in - or are equities priced for a massive EUR devaluation that enables surging nominal growth next year?
Charts: Bloomberg