Europe Opens To Risk Off Amid Low Volumes

Since the European markets opened we have seen modest selling pressure, admittedly with little to no volume and thin liquidity wherever we look. The overnight ebullience in ES (the e-mini S&P futures contract) was not matched by other broad risk assets as CONTEXT (the risk asset proxy) rose only mildly and is now dropping (back below US day session closing levels). The main drivers of correlated derisking are rallies in TSYs (levels and 2s10s30s compression) and mild selling pressure in JPY crosses (AUDJPY most notably). Oil and Copper are finding 'up' is the path of least resistance for now and Gold and Silver are also pushing higher even as the USD has started to rollover a little in the last hour or so. A weak UK services print and Italian consumer confidence has Gilts rallying and (pivot security du jour) BTPs selling off, as the former 2Y hits a record low 0.299% and the latter breaks 500bps over Bunds (in 10Y). Asset correlations have been ebbing and flowing all week and while credit and equity have largely been in sync (as the former reracks off the latter), we note that Sub financials are underperforming so far and Main (investment grade) and XOver (high yield) have leaked wider from the pre-open in Europe.

10Y BTPs are trading back over 500bps to Bunds - hardly a signal that the LTRO carry trade is in full swing.

CONTEXT (our proxy for global risk asset movements) has underperformed three times this week as equity exuberance has frothed and retraced. Correlations have swung from very high to almost negligible (yesterday afternoon in the US as a good example where even the now infamous 2s10s30s correlation subsided to spurious). Broad risk assets are leaking lower this morning and slowly ES is following.

Liquidity measures are stable with FRA/OIS slightly wider (worse) and EUR-USD basis swaps slightly compressed (better). Euribor came in a smidge better but we suspect that most have window dressed for year-end by now and that Euribor volumes are miniscule.

Charts: Bloomberg and Capital Context