For years, the rally and the mindless masses who have perpetuated it in the face of epochal geopolitical shifts (e.g. the rise of populism), debt crises (e.g. Europe’s sovereign debt debacle), the winds of war (e.g. North Korea and Syria), and all manner of other stumbling blocks that by all rights should have given skeptics some respite, mercilessly hunted the bears and summarily slaughtered them with a cold precision and efficiency befitting of an alien hunter stalking human prey with advanced weaponry.
The rally’s latest kill came in January and it was brutal even by the standards of a rally that’s been defined by brutality towards bears. The bull massacred market cynics with a $40 billion inflow into U.S. equity funds that helped drive stocks to one of the best starts to a year on record.
But the rally made a mistake. This time, it got hit. This time, a selloff in bonds injured the bull. And last week, the bears gathered around the mauled body of a fallen friend and they saw something – a spattering of neon green blood on a leaf.
“The bull bleeds.”
“The rally is mortal”
And “if it bleeds, we can kill it.”
This week, the bears moved in and exacted their vengeance. First, a 23-standard deviation VIX ETP rebalance flow spelled the end for XIV and mortally wounded SVXY, two vehicles that have been the bane of bears’ existence as they represent the source of market skeptics’ pain: suppressed equity vol.
The next morning, the VIX spiked to 50, its highest intraday since the yuan deval:
Stocks tried to recover over the next two sessions but on Thursday, the bottom fell out again as the Dow fell more than 1,000 points for the second time in a week. Stocks entered a correction from their January highs:
Friday was a rollercoaster with the Dow swinging wildly from gains to losses and back again in a 1,000-point range:
But Friday’s late rally notwithstanding, the week was a disaster and by the time it was all said and done, stocks took a massive hit for the second week in a row. Here’s what the last two weeks’ red ink look like going back to the crisis:
Remember that $40 billion that was plowed into U.S. equity funds in January? Yeah, well that’s gone. In the week through Wednesday there were some $30 billion in outflows:
The proximate cause for it all (i.e. what started tipping dominos) is of course the bond selloff. 10Y yields are at their highest levels since 2014:
The previously beleaguered dollar posted its second week of gains:
The risk-off sentiment is spilling over into high yield, which is not a good sign:
And here’s that chart with the S&P:
Oil didn’t help high yield’s cause, diving nearly 10% for one of its worst weeks in two years:
Expect CSPP to help European credit remain resilient (I mean, they’re not buying speculative grade, but obviously the CSPP bid trickles down via hunt for yield):
Speaking of Europe, the DAX fell into correction territory on Friday, off more than 10% from its January 23 peak. Have a look at this chart which gives you an idea of how acute this situation is getting for European shares:
Moving to emerging market equities, they’re in a correction as well:
Horrendous week China:
Bear market for the Shenzhen:
Hong Kong was a bloodbath. Worst week since the crisis for the Hang Seng:
Japan was a disaster too, with the Topix falling more than 7% on the week.
Of course the only downside for the bears when it comes to finally killing the bull is that thanks to the years of accommodative policies that have helped to inflate risk assets across the globe, the consequences of an unwind are as yet unknowable.
Which means that when this historic risk rally finally dies, it might self-destruct and kill us all…
And that’s your week, goddammit.