Market Snapshot: Credit Outperforming In Europe But Mostly Catching Up

A green day in Europe as last night's superfluous strength in US equities caused reracks in every major European risk class out of the gate. The early strength in Europe was faded quite quickly but the bias was up - even as no new news/plans/clarity was announced and in fact was modestly worse with a lack of capital injection for Dexia noted. Credit and stocks ratcheted higher in three lurches with covering clearly evident in credit as even Belgium and France sovereigns managed small compressions (which makes little sense) though the former remains notably wider on the week (rightly so).

We also note that while credit indices (above) do indeed look better on the week, underlying single-names are notably wider which coupled with US corporate bonds suggests many are using strength to cover longs in 'riskier' credits. ITRX Main (Europe's investment grade credit index which includes financials) is 3.5bps tighter from Friday while its underlying single-name fair-value has widened 8bps and XOver (Europe's high yield index) is 4bps wider from Friday while its intrinsic value is 31bps wider...suddenly doesn't seem so positive eh (and Senior financials -9bps from Friday with underlyings +10bps!!).

FX traded in a narrow range (light blue oval) from the US close but the USD was at the stronger-end of the channel as Europe closed (IMF - ECB easing potential comments) but commodities were mixed with lackluster moves overnight though silver and copper sold off the most - not enjoying the excitement in equities - but since the pre-market, all PMs and commodities have pushed higher with silver and gold outperforming on the week now.

TSY yields leaked higher but the curve flattened but we see HY net-selling against IG net-buying (but several major financial bonds being net-sold including MS, GS, and C).

ES has re-coupled with a longer-term context reducing some of the urgency in equity's bounce - though we note on a medium-term basis equities remain significantly expensive to credit still.

All-in-all, it seems like we can bleed higher inch by inch as retail gets sucked into another 'recovery/bailout' but under the surface, the 'things' that should be benefiting are simply not as professionals use this strength to rotate hedges or more simply unwind at better marks. We will be watching for issuance windows in credit to re-open today/tomorrow and what level of concession we see to get an idea of reality to this rally.

Charts: Bloomberg


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