Clearly a risk off day today but the level of “bearishness” was not enough to say there is clear sailing to the downside. From a technical standpoint (see charts below) a lot of damage was done but things like breadth (net declining issues) although weak were not at levels you would expect on a 2% move. Copper and oil were both weak on the day but more in line with the .67% rise in the USD (DXY).
I’m not trying to rain on the parade of the bears, trust me I am glad to witness today’s price action. I do believe caution is warranted though. Remember on October 4 the intraday reversal was not expected to be as strong (self included) as it in fact was. So why would today’s move be any different from a trader psychology perspective. Many will view this simply as “markets were due for a pullback.”
I do believe it was in fact more than that considering the 16% move in the Vix. The one piece that has been missing from this market has been fear and uncertainty. Today both returned. Fear clearly as measured by the Vix and uncertainty by the words of various EU members.
They are downplaying expectations of this weekend’s EU summit and clearly stating a utopian type fix is not going to be announced. Heaven help them if a French bank or multiple banks find themselves shut off from various overnight lending facilities. An emergency without a plan does not bode well for investor confidence.
Earnings were front and center again and investors saw through the accounting gimmicks of Citibank where they booked revenue associated with rising costs of their debt. Does that make any sense? Even typing those words sounds foolish.
Some how, some way if your debt was trading at 80 cents on the dollar and because you are perceived as a higher risk that debt falls to 50 cents on the dollar (remember the lower the cost of the debt the higher the yield) you can book the difference as revenue (I may be simplifying the equation but that’s the general concept). In theory you can buy back your debt for less money thus the “accounting” gain.
Wells Fargo missed on their earning and was sold off hard, down 8.5% on very heavy volume. BAC is up in the morning and that should be a very ugly report. Expect revenue and or EPS to beat from “debt accounting” and reversal of loan loss provisions (more on that in a future post).
Lastly I believe if we are in fact entering a period of liquidation to raise cash among EU banks as reported by Deutsche Bank this weekend then correlations among asset classes may begin to decouple (hate that word). For example if a bank is trying to raise cash they may be selling treasuries. That doesn’t mean that money will flow into equities. EUR/USD strength may no longer result in higher equity prices as EU banks selling USD based assets sell USD and buy EUR to repatriate those funds.
Now for some technicals on the day.
In hindsight the original channel off the August lows could have been drawn much wider and the result it captured Friday’s highs and acted as resistance today. Additionally the previous channel has failed to break through on two occasions now. That’s two head fakes of a breakout.
My third ES chart, trust me I’m not starting to trade the “futures.” Interesting technicals on the ES though and if in fact it is the future well it does not portray a pretty picture for continuation of the “Dexia” rally.
Images: Flickr (licence attribution)
About the Author
Macro Story is designed as a one stop source for all of your macro related news and data. From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion. Content is presented in a format that allows you to read as little or as much as prefered. Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.