Financial Weakness And French Distress As European Equities 'Stable'

A wonderfully orchestrated 1Y Bill auction in Italy and some clear 'help' from the ECB early on was enough to shift a heavy BTP market in a positive direction for the first time in a week. However, while headlines will be writ large with the 40bps compression in 10Y BTP spreads to bunds, the action in the last few hours of the day in French bonds, European financials, and higher beta credit were much more symptomatic of risk aversion than buyers coming back. Record wides in OATs and EFSF spreads as senior and subordinated financial credit is dramatically wider on the week. In the same way as yesterday, ES was exactly 'balanced' as Europe closed, having shifted back to VWAP as broad risk assets leave a slight positive bias though the selloffs in gold, silver, and copper (and AAPL) suggest some liquidation was underway - even as the dollar leaked lower a little from overnight highs.

The red arrow shows the performance of Senior and Subordinated financials, Orange arrow is Main and XOver, and Green is the equity market. It seems once again that equities are holding the hope line - especially as the core starts to disperse significantly.

The spread between BTPs and Bunds dropped the 3rd most in absolute terms ever - impressively - but did end up 13bps wide of its intrday tights and still wide of the close from Tuesday - unimpressive.

But it was both the French bond market and the rescue fund EFSF that were a disaster today. For some context, the spread between French and German bonds rose 21bps - the most ever in a day and over 10 standard deviations!!

EFSF 10Y bonds trade 177bps over Bunds, having widened over 65bps since the EU summit. The EURUSD had a 170 pip range - ending nearer its highs than lows hovering near 1.36.

All-in-all, some positives from the trading day but it smells much more like a rest rather than resumption of buying and the moves in credit are much more worrisome - especially as short-sale bans are extended.

Charts: Bloomberg


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