European Weakness Spreads And Accelerates

European equity prices fell for the third day in a row and pulled back near six week lows, breaking below the 50DMA for the first time since it crossed above on 1/16. Today's drop was the largest in three weeks as Italian banks were halted (and Spanish banks sold hard), plunging their most in over three months and back at levels not seen since mid January. Most Italian banks are down 9-11% in March but BMPS is down over 24% as Italian sovereign yields start to come unhinged again (ironically a day after Monti announced the crisis was over). 10Y BTPs broke back below last Friday's lows (the moment the ECB stepped in last time to save the day) up over 5.2% yield - catching up to CDS levels (and ITA spreads are +23bps on the week). Spain is also weak (+15bps on the week) and heading for 3 month highs in its yields. Since the CDS roll (March 20th), the sell-off has accelerated with equity and credit markets tracking lower together (as opposed to the last few months where credit underperforms and then snaps back higher). We discussed the LTRO Stigma trade earlier and that has continued sliding notably wider today as LTRO-encumbered banks hugely underperform. We suspect hedges (sovereign credit, financial credit, and equity) placed early in the year for the 3/20 Greece event (among other things) have run off and now managers are reducing risk in real terms (selling) as opposed to replacing hedges which is why the uber-supported markets of Italy and Spain are losing the battle now. Lastly, Europe's VIX is its richest relative to US VIX since the rally began, jumping dramatically today.

The BE500 (Bloomberg's broad European equity index) dropped for 3 days in a row and the most today in 3 weeks - near 2 month lows...

 

Italian bonds have struggled notably in the last few weeks. Today saw us re-test the lows from Friday when the ECB came in-like-Flynn to save the day...no sign of them this time...

 

And implicitly (given that they are increasingly integrated with their government and entirely behooven to the MtM risk of the Sarkozy carry trade...Italian banks have been crushed this month (and the last few days even more so)...

Spanish banks were also weak today (and have been for a week or two) - how long before we hear a short-selling ban reinstated?

And since the CDS roll on March 20th, credit and equity markets have plunged notably in sync...

And finally Europe's VIX (V2X) has risen notably relative to the US VIX (lower pane) with a big jump today in the differential (now near its largest differential - and ratio - since the rally began in November). During this time, each push in V2X has led a push in VIX so perhaps a higher VIX is warranted or more specifically long VIX, Short V2X...

 

Charts: Bloomberg