European Credit Weakens As Stocks Rally

European markets are thin this week, thinner even that in the US from what we see in credit runs and equity volumes, but today saw a notable divergence between credit (sovereign, financial, and corporate) and equity markets continue. The broad BE500 equity index (of European stocks) rose majestically in the European afternoon (after US day session began), ending the day nicely positive, while spreads were wider in every category. Financials were the worst performers in European credit as they didn't see any bid into the close even as investment grade and crossover credit rallied modestly. There are a lot of divergences (and breakdowns in correlation) occurring in and across asset-classes as we see EURUSD weaken - unch now (weak auctions, macro data, or market recognition of ECB QE that is not QE occurring), Gold down (because the dollar is up? liquidation/collateral/cash needs?), Stocks up (QE that is not QE again?), Corp and financial credit wider (nothing is solved and QE does not help a spread-based not currency-based numeraire), Sovereigns wider (nothing is solved and even ECB buying is not working now). Its always tricky to read too much into Christmas week trading - low volumes, high marginal impact, and year-end rotations and window-dressing (cash management), but the trend in risk assets overall seems to be lower not higher, no matter how you squint at it (even though last year's opening-day rampfest is fresh in most people's memories).

Stocks (the dark blue line) outperformed notably into the US day session. Financials (senior red and sub light blue) stayed stubbornly wider (lower on the chart) while investment grade and crossover credit did rally (rerack more like) but remained wider on the day.

European sovereign spreads are notably off yesterday's tights and even with the ECB rumored to be in this afternoon, Italian markets did not rally much at all (leaking off into the close). French spreads look worrisome (+19bps from Christmas Eve) as the downgrade seems ever closer.

And the EUR is now practically unchanged on the day (still holding the cliff-like losses from yesterday). This has pulled Silver and Copper back from the edge but Gold remains down (collateral/cash/redemptions?) as does Oil (inventories).