Credit has come off from recent “panic” levels. European iTraxx main index is currently trading below the 75 level for the first time since the big spike we saw in late December. Note the trend line around these levels.
Watch this space closely as it has been a big driver of risk during the autumn turmoil. We would not be surprised to see people realizing they loaded up on protection at way too rich levels.
Below is our Eurostoxx 50 (orange) versus credit (white inverted) chart updated. Note how the two assets remain trading in tandem. For now, there is no “dislocation” but given the fact investors have loaded up on protection, be sure to watch the credit space carefully here.
Another important indicator to watch here is the VIX futures curve. The below chart shows the VIX 1st versus 6th futures months spread. A positive spread is a sign of stress while the spread trades in negative territory in calmer markets.
We mainly like to view this as a contrarian indicator when looking at the volatility space. Investors are still in stress and have loaded up on long volatility trades. We pointed out this in late December, and we stick to our logic that markets don’t crash when the crowd is bearish.
Source; charts by Bloomberg
