We have been pointing out the fact European credit, iTraxx main, has been “dislocated” from the Eurostoxx 50 index. This dislocation has now “come in”. It is hard to say implications regarding the overall market from here short term, but credit gave support to equities during the sell-off. Over past days, credit has reacted relatively more than equities.
Below is the Eurostoxx futures (VG1, orange) versus iTraxx (white inverted).
We will continue watching this relationship so stay tuned for further possible dislocations. For now, the long Eurostoxx vs buy protection in credit trade has played out well, and it is time to move on.
Source: chart by Bloomberg