We warned yesterday that European credit markets were sending very different signals to the equity markets and sure enough today saw a bloodbath across European equity, credit, and sovereign bond markets. Portugal and Spain 10Y spreads are now +46bps wider on the week (and Italy +30bps) with Spain back over 6% yield (460bps spread) and at more than three-week wides. While plenty will say 'but look where we came from' when today's dumpfest is put in context, but the critical aspect is the velocity and severity of today's 3-4% drop in Italy and Spain's equity markets and European banks now down over 9% from their post-FOMC peak (retraced more than 60% of the post-ECB rally). Europe's VIX jumped to over 22% as credit spreads (most notably subordinated financials - thanks to the 'AAA'nxiety over the banking union) were smashed wider. It seems Ben's all-in move was the catalyst to bring a realization that things may indeed be worse than we thought - as sovereigns have blown wider since.
European stocks (blue) vs credit...
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European stocks have shaken off the post FOMC liquidity spike with Italy -6% and Spain -1.5% (but down over 3% today)...
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and whether Ben's QEternity was the catalyst for a realization that things must be a lot worse than we know is unclear - however - European sovereigns have crushed wider since...
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Charts: Bloomberg