The decoupling/recoupling we discussed earlier in the EURUSD pair seemed the biggest deal in Europe this week as the 2.5% gain is thge most in a month and takes the cross back to near 3-month highs. Not to be outdone, the VSTOXX (Europe's VIX equivalent) dropped notably and now stands at its lowest in 7 months - dramatically outperforming equity and credit markets on its way as selling vol appears the easiest trade ever (until of course your arms and legs are ripped off by a risk flare). Credit markets outperformed this week as equity underperformed - bringing the two asset classes closer into sync after last week's plunge in credit. Sovereign credit markets were mixed but clearly the high-beta compression trend has stalled as Portugal underperformed dramatically followed by Belgium with the rest generally tracking sideways (and Spain outperforming modestly).
Just like in the US, vol has dropped notably since the pumps of the world money pipe were turned on. Credit has rallied, there is no doubt, but as is clear the relative risk premia for downside protection (equity vol vs credit protection) is quite notably different as VSTOXX reaches 7-month lows.
Interestingly, vol dropped as stock prices (blue above) dropped this week in Europe. Credit markets rebounded off the mid-last-week plunge as it seems like there is more of a convergence trade than a broad risk-on sentiment here - as credit 'over-reacted' short-term.
EURUSD has surged higher this week - up around 2.5% against the USD alone with SEK and CHF following suit. JPY's weakness -1.65% has kept the USD in relative balance as it has only lost 1.35% of its relative purchasing power this week as Oil has exploded over 5%.
Sovereign credit spreads went sideways to wider this week. The ubiquitous, supposedly LTRO-sponsored curve compression trade has stalled now for a week or two. Perhaps next week's LTRO will provide more ammo but we suspect that 1) there will be less demand for the carry trade since the economics are far less attractive now; and 2) the stigma will ward off the biggest players leaving the smaller more risky, least systemically protected banks soaking it up.
Charts: Bloomberg