Post the ECB decision, European credit (iTraxx) continues crashing. Just as we outlined yesterday, iTraxx has been trading way too rich and is now reverting back to more “normal” levels. On December 5th we outlined logic for the “macro pairs trade” between iTraxx and the Eurostoxx 50 futures.
With credit in full retracement mode, this played out well as a mean reversion opportunity trade.
Just as yesterday, credit drags equity volatility lower as well. Below is iTraxx (white) versus the V2X (orange).
Credit went from extremely “bullish” in early November, to extremely “bearish” relative to other assets, especially versus the Eurostoxx 50 futures. With the two day move lower in credit, the relationship has come in massively as credit has outperformed big relatively speaking. Note the big iTraxx move (white inverted) versus the relatively small Eurostoxx 50 futures (orange).
That was probably one of the last good macro mean reversion set ups for this year. Now back to watching paint dry as Santa approaches.
Source; charts by Bloomberg
