Tech Selloffs, Taxes And Eonia Mysteries

No sooner had markets made Wednesday’s tech bloodbath a distant memory by staging a furious rally on Thursday predicated almost entirely on tax cut optimism, than things went awry in the Senate where lawmakers, still wrangling over the tax plan’s implications for the deficit, suspended voting until Friday.

To be sure, this is the kind of thing that happens when you do a half-assed job putting a piece of legislation together and then try to cram it down everyone’s throats. Additionally, it’s worth reminding you that this is farcical. It’s a complete joke. The Joint Committee on Taxation was out Thursday saying the whole thing would likely only boost GDP by 0.8% (on average) over the next decade, and that wouldn’t even come close to covering the lost revenue. The shortfall is pegged at $1 trillion.

“When you put all the pieces together, what you’re left with is we are squandering a giant sum of money,” Edward D. Kleinbard, a former chief of staff at the Congressional Joint Committee on Taxation who teaches law at the University of Southern California told the New York Times. “It’s not aimed at growth. It is not aimed at the middle class. It is at every turn carefully engineered to deliver a kiss to the donor class.”

Anyway, Asian shares took the renewed drama on the Hill in stride, but Europe is struggling and U.S. futs are looking shaky.

One notable out of Europe is that the tech selloff has resumed. The SX8P is now down some 5% this week. Volume on Friday is 31% more than the 20-day average:


More broadly, this is a decidedly inauspicious start the December for European shares. The Stoxx 600 is kissing the 200-DMA:


And here’s the Stoxx 50, the DAX, and the CAC:


So that’s your setup for the U.S. and again, futures are down with the Nasdaq bearing the brunt. If you’re long risk, you better hope the Senate doesn’t fuck this up entirely, because if they don’t manage to live up to expectations today, it’s going to send markets off to the weekend on a decidedly sour note.

Oh, and keep an eye on the Eonia “mystery” mentioned yesterday. “If it turns out that the spike in Eonia fixings is not just an idiosyncratic matter and these higher rates become the new norm, it will have some significant implications across markets,” one short-end trader told Bloomberg’s Richard Jones this morning. “Most at risk is the positive roll-down on the curve, whereby traders lend out cash in advance (ie receive the periods) and borrow it back more cheaply day-by-day (ie pay the lower daily fixing rate). A disruption of that trade would cause substantive pain in the euro STIR markets, upending markets as traders are stopped out of positions.”

And of course, as noted yesterday afternoon, if short-end rates move in favor of the single-currency, that could catalyze a further rally in the euro and potentially exacerbate weakness in European shares.


“The most plausible interpretation is borrowing from one or several non-European banks, possibly EM,” SocGen mused, adding that “the massive spike in fixings underlies the fragility of the Eonia benchmark in the current context of high excess liquidity and low volumes in the O/N unsecured lending segment.”

Who knows.


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