No Resolution.

Well, it was an interesting week to say the least and nothing was resolved.

The same market narratives that were front and center heading into Monday are still at the forefront of traders’ minds as we head into the weekend. Italy remains an unsolved mystery, emerging markets look even more fragile now than they did five days ago (Turkey’s “impressive” rate hike notwithstanding), and the ECB is keen on telegraphing the end of APP even as the data out of Europe continues to underwhelm.

U.S. equities rose for the third week in a row and the fourth in five despite trade jitters effectively limiting gains by serving as a constant reminder that there’s a goddamn lunatic running the country:


Treasurys were interesting this week as bonds were heavily bid on Thursday afternoon amid a selloff in the Brazilian real and then again on Friday morning when an Apple headline crossed and triggered another flight to safety:


Ultimately, here’s where things stand on 10Y yields (i.e. pulling back to digest where we are after the rally that accompanied the Italian turmoil took us back below 3%):


Third straight weekly decline for U.S. crude:


In Europe, investors could use a reprieve. The Stoxx 600 logged a third weekly decline, marking a rather abrupt about-face following one of the best runs in years:


As for Italy, the relief rally that accompanied the successful effort to salvage the Five Star-League coalition government is for all intents and purposes a memory. Italian stocks fell on Friday and closed out their fifth week of declines:


Here’s bank credit across the pond with Italy CDS just to show you the extent to which the worries have had an impact:


When you think about European junk, it’s worth noting that the Xover/Main ratio is the lowest it’s been in a year, and it still has room to compress if you go by cash. Here’s Bloomberg’s Tasos Vossos:

Investors worried about systemic risk in the euro area are hedging exposure in the credit default swap market, where junk is outperforming investment grade. While this may seem counter intuitive at first glance, it reflects exposure to the periphery and BofA Merrill Lynch expects the trend has further to run. The ratio between the  iTraxx Crossover index, the junk tracker, and the iTraxx Europe or Main, the investment-grade counterpart, has fallen to the lowest in almost a year.

The reference to BofAML there refers to the following excerpts from a piece we documented on Thursday:

Crossover vs. Main — compression is playing out and still attractive If the end of the carry trade starts with a selloff of BTPs that could also bring the HY trade to a halt. HY is currently dominated by Italian but also Spanish names (17% and 9% of the index respectively, dominated by financials) and thus it is highly susceptible to a peripheral risk-off. We think that a XO vs. Main compression trade is a more conservative way to reach for beta.

  • Firstly, we find that XO portfolios are less exposed to peripheral risks and thus it feels that the beta in the synthetic market can do better from here. With Crossover S29 having 16% peripheral exposure vs. 30% in case of Main S29 (including the indirect exposure via core-financials, chart 18) we think that XO vs. Main has scope to outperform should spreads trajectories remain weak going forward.
  • Secondly, note that XOS29 seems to be the least systemic part of the credit market, as it has less % exposure to fins and peripheral credits.
  • Last but not least, we think that based on moves in the cash market, synthetics present a more “conservative” way to play compression and reach for beta/yield (chart 17).


So that’s something to think about if you’re a € credit trader which I know every single one of you is.

Another egregious week for Italian financials, which are still in a bear market:


Honestly, this situation is deteriorating steadily and it seems like we could be right back where we were during last week’s panic in relatively short order:


It looks to me like 10Y yields for Italy were up something like 41bps on the week, which certainly doesn’t scream “this is fixed”:


Emerging markets are a mess as central banks desperately attempt to fend off currency depreciation in the face of a Fed that doesn’t look inclined to show much in the way of mercy.

The Brazilian real was in focus all week and after a couple of failed attempts at intervention, BCB finally hit a home run on Friday by promising to flood the market with dollars. This is an enormous rally:


That came after Thursday’s harrowing rout that catalyzed a quick rally in U.S. Treasurys around 2:00 ET.

The Argentine peso was crushed to close the week when the central bank stopped defending 25 after the IMF deal. Here’s a brief history of this train wreck:


CBT has finally gotten control of the lira, although it remains to be seen how long Erdogan will tolerate a continual tightening of monetary conditions in light of his ongoing crusade to triumph over interest rates which, in his mind, are evil incarnate:


You get the idea. This is just a desperation push on the part of EM to keep things from falling apart as the Fed stays the course. This is funny:


Finally, for your moment of zen…




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