Who do you believe?
Only six weeks after the EU summit, that tried to convince investors that is all is well again, markets are sending quite controversial signals. After Monti’s bluff, Rajoy’s threats and Dragji’s promises Europe’s stocks continue to defy gravity, with Spain and Italy up 10%-15% since the summit alone. However, if we take a closer look to what is supposed to have been fixed, it seems that the bigger picture has not changed substantially: 10 year Spanish spreads are 10 bsp wider than the pre-summit levels, 10 year Italian spreads are only 10 bps tighter, 10 year Portugal spreads remained unchanged and the Bund outperformed Treasuries by 15 bps. Apart from that, European corporate and financial credit rallied, but has dramatically underperformed, especially after Draghi’s announcement. Investors hopes for more Fed or ECB aid , that sent stocks soaring, had the unintended consequence of spilling into the energy markets, with crude oil prices up over 20% after the summit (while the USD is unchanged!). With the funding cost for European sovereigns being the real issue (which in reality remained unresolved since the absolute nothing out of the EU summit) the inevitable question comes up: Who should we believe?