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Monday Technical Update: Halloween Horribilis.

  • Written by Syndicated Publisher 34 Comments34 Comments Comments
    November 1, 2011

    Happy Halloween! Now that was a wild ride for sure. Lots to discuss so I’ll keep the pre-opening banter to a minimum. I would advise caution here both long and short. Markets seem to be not only extremely on edge with the 20% ramp of the past four weeks but also in unchartered waters with the MF Global bankruptcy filing.

    First and most important, the EU debt crisis is a global problem. That was proven today. Contrary to many who said it would have little to no impact on US markets, MF was the first global financial institution to file bankruptcy because of sovereign debt. One of the 22 primary dealers went under. They placed a highly leveraged bet on EU debt and were wrong. Anyone thinking of speculating on future EFSF debt issuance may be a little gun shy going forward.

    JPM has nearly 2 billion in unsecured credit owed to them. Where do they fall in the bankruptcy court in terms of getting paid? Who else was a creditor to MF? Who else has sovereign debt exposure that was hedged with CDS and may not be as safe as originally thought?

    Most immediate though the impact of MF filing “bk” caught a lot of traders by surprise. Best way to explain what happened is through the famous ”Wolf man” from CNBC who was quoted via Business Insider explaining the problem today.

    “MF is/was the clearing firm for many sub-firms, which means that many traders ultimately were having their trades cleared through MF Global, even if they didn’t know it.”

    “ANYONE who somehow has their trades cleared through them was unable to trade today, and that means that any trader who had open positions is just sitting there watching the market move, while they find a new firm.”

    “They’re not allowing people with open positions get out of it.”

    “This place is decimated … Crickets.”

    “Euro options pit probably has half the traders out there.”

    “Currency options has a 10th.”

    “Not going to let anyone on the floor tomorrow that’s clearing through MF Global.”

    “People who have huge positions. They must be pulling their hair out.”

    Greece Wants Out And Spain Wants Forgiveness

    What seemed to really get markets moving to the downside though are reports that Spain is now asking for debt forgiveness (remember moral hazard – Macro View) and word that Greece will ask the people to vote on whether or not to support the recently negotiated bailout.

    What had been a calm day in terms of volume although very red in price turned into a rush for the exits as exhibited by ES volume. Intraday about 20,000 contracts traded on each 5 minute candle until the close when it shot up to over 200,000.

    Major FX Swings

    Already stretched currency markets got the kick they needed with Japan intervening and trying to peg the USD/JPY at 79.20 which is failing with a close today at 78.14. The move by the BOJ put pressure on the EUR/USD and gave the USD a nice bid.

    EUR/USD – The entire gain in this currency pair since the EU announcement on Thursday has been given back and technically the pair looks poised for much further downside.

    USD – Very bullish reversal day today with a gap open and successful test of the 200MA.

    Treasuries Reversing

    Like the EUR the gains of last week have quickly been reversed across the yield curve with the 10 year looking very bullish in terms of price, bearish in terms of yield (shown below).

    ES Late To The Party?

    One of the few asset classes not giving up the gains of last week is the ES. Notice the divergence or shall we say “richness” between the ES and EUR/USD, a pair that trades with a very high correlation. This points to further ES weakness in the coming session(s) barring no reversal in the EUR.

    Bottom Line

    Today was a very volatile day but has a feeling of some “monsters in the closet” waiting to jump out at a given moment.  Amazing it is also playing out like that of July 21-22 which was the euphoria of the first Greek bailout and May 19, 2008 both of which preceded some decent market declines. For now caution is warranted and emotions should be tempered. Sure was fun though.

    Images: Flickr (licence attribution)

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