It has been an 'epic' week in European sovereign bonds. Whether it was returning traders or pension fund asset managers forced to reach-around, Spain and Italy 10Y spreads are 44bps tighter this week and Portugal a ridiculous 92bps (on what!!? - US fiscal cliff?), though Spain and Italy stabilized today. Broad European equities surged the most during the first 3-days of 2013 in five months (with Spain and Italy up 3.6-4%) but today saw credit notably divergent from the ongoing exuberance in stocks. EURUSD gave up some significant strength this week as repatriation flows reversed but Europe's VIX has been crushed just like in the US. Europe's Composite PMI is still below (though modestly rising) but it is the stagnation of the New Orders sub-index that should be most concerning - perhaps that is what credit is anticipating.
3-day change in European stocks was largest in 5 months...
[5]
European stock indices in general surged...
[6]
As did European sovereigns - except it seems some read our discussion of Spain's reacharound...
[7]
EURUSD is slumping as repatriation flows reverse back out...
Europe's VIX is crushed...
[8]
But credit is notably divergent today from stocks...
[9]
Charts: Bloomberg