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Risk Leaking Off As Europe Closes

European credit and equity markets rallied today but there was considerable relative underperformance by the former (especially in financials). Sovereign spreads leaked wider all day and started to lose it more rapidly into the close. It looks like Senior versus Subordinated decompression trades were placed in the European afternoon (a bearish trade ion financials) and even with the ECB in the market, BTPs closed above 500bps over Bunds (just shy of 7% all-in yields). Broad risk assets also lost ground as Europe's bid eased off as Oil eased back off its best levels and FX carry came off its highs of the day. US Treasuries are rallying after trying to converge earlier and 2s10s30s is also dragging risk lower for now.

European financials underperformed (though were tighter close to close) with subordinated spreads notably disconnecting weaker in the afternoon. The senior-sub decompression trade is a low vol way to express a notably negative perspective on European financials. Equities (dark blue) significantly outperformed credit on the day also as the US day session helped extend the excitement in stocks but did nothing for credit.

European sovereign bond spreads widened all day with some help from the ECB in BTPs holding them slightly better than most. Spain and Portugal were worst and France keeps going wider - a trend we noted last week. SovX was the only liquid credit derivative index that decompressed today.


Broadly speaking, risk was leaking lower in the European afternoon and at the European close, ES (the e-mini S&P 500 futures contract) compressed rapidly to CONTEXT (the broad risk asset proxy for ES) and is following risk lower - though admittedly marginally for now.

Silver and Oil are losing some of their enthusiasm as Europe closes but Gold is holding gains for now.

Charts: Bloomberg and Capital Context

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