Bloodbath, or Overdue Correction?

The MorningSnapshot
June 21, 2013

It Was A Bad Day For Some Traders

Yesterday’s BIG Wrap-Up
Risk-assets were decimated yesterday. Almost every major asset class experienced a 1.5-3 standard deviation move lower, most on heavy volume due to an addiction to stimulus. Near session close, basically the only green across the blotter was the USD (obviously, classic risk-off trade), the VIX (even more obviously), OJ futures, and coffee. The S&P 500 tanked -2.5%, the most in over two years, and closed below 1,600 for the first time since 5/3. VIX cash closed above 20 for the first time this year. Gold plummeted down -7.11% to $1,276, while copper and crude oil both fell nearly -3%. Treasuries took the biggest hit on Wednesday, but yields continued to advance across the curve yesterday. Twos rose +1.63bps to 0.3227%, tens +5.9bps to 2.4117%, and thirties overtook the Sept. high of 3.5% rising +10bps.

The ‘bloodbath’ (or a much overdue correction, depending on how you look at it) comes after Bernanke reiterated Wednesday a statement that was first given during his May 22 testimony before congress. He essentially told markets that tapering of bond purchases was possible this year IF economic conditions were to warrant it. No one can know exactly how Ben thought the market would react, but this market observer thinks he had to have known it could turn ugly, although he and the FOMC really only reiterated prior statements. QE is data dependent, that is, the Fed has the option of lowering OR raising its current $85B of purchases per month. We know that. And now, although I think the reaction is overdone, I do believe the market has failed to price in the true state of the global economy – I just don’t think it’s going to start on Monday.

Morning Commentary
Treasuries are steady and holding near Aug. 2011 highs, while U.S. stock futures are recovering slightly from yesterday’s tremendous sell-off, currently higher by +0.25%. The dollar is also trading higher, up by +0.3%, and the euro/dollar cross is down by -0.4%. Gold futures are nearly +0.4% higher, while crude oil is up +0.1%.

On a day devoid of economic data, let’s sit back and see how assets close out the week. I will say that over the past hour, we have seen overall deterioration in sentiment.

Today’s Economic Data Lineup (EST)
No major economic data
11:00am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector

North America

  • Economists surveyed by Bloomberg News believe the Fed will begin to trim back its monthly bond purchases from $85B to $65B in Sept. and end buying in June 2014. The survey which included 54 economists was conducted June 19-20, following Bernanke’s press conference.


  • ECB Executive Board member Joerg Asmussen told reporters that EU ministers are in for “a long day” ahead of meetings in Luxembourg today regarding how to set rules for assigning losses when, not if, banks fail. The biggest arguments will be over when nations can invoke financial stability concerns to protect some bank investors who would otherwise be forced to take write-downs.
  • The U.K. budget gap narrowed in May as government spending fell and the Treasury got a £3.2B boost from a deal with Switzerland to fight tax evasion. Net borrowing excluding temporary support for banks was £12.7B versus £15.6B a year ago. High levels of borrowing will be highlighted next week during a regularly scheduled spending review, which reveals how much austerity is still ahead.


  • China’s one-day repo rate touched an unprecedented high of 13.91% yesterday, leading many to speculate the central bank was forced to pump liquidity before the rate dove today by the most since 2007. A prolonged constriction of interbank liquidity would trigger a much broader credit crunch that would further depress an already slowing economy.

“If you have built castles in the air, your work need not be lost; that is where they should be. Now put foundations under them.”
-Henry David Thoreau


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