One of the interesting things about Monday was the extent to which two of the market’s key idiosyncratic tragicomedies continued to devolve despite the generally broad-based rally in risk.
Despite the trade detente announced by Mnuchin on Sunday, the BTP situation deteriorated meaningfully as the market fretted over the prospect of a parallel currency in Italy and the Turkish lira, already in free fall, fell to fresh record lows amid ongoing jitters tied to Erdogan’s truly unhinged (yet simultaneously deadpan) Bloomberg interview from last week.
As noted on Monday evening, idiosyncratic stories aren’t prone to resolving themselves in tandem with the broader market – that’s kind of what “idiosyncratic” means. That said, the pain in Italian bonds and the Turkish lira on Monday was nothing short of egregious and seemed to suggest that the QE regime, where “risk on” was a wholesale mood that applied across the board irrespective of country-specific risk factors, is dead. In a world where the DM central bank “put” is in question, traders aren’t going to be as predisposed to buying every dip in everything at the first opportunity.
With the trade news having improved further overnight, one question is whether the dip buyers will emerging in Italian bonds and/or in the lira. Here’s former trader turned Bloomberg columnist Richard Breslow:
There are a lot of traders grateful for the populist scare going on in Italy. Not that they support the draft governing platform nor think this will provoke true fiscal reform and integration within the euro zone. Rather, it remains a buy-on-dip world and people spent much of the last few days just trying to figure out where. They have decided to give it a try this morning. For all of the understandable hand-wringing over what is a mini-BOT, I got little sense that fear has been the dominant partner of greed as we’ve watched Italy and emerging markets beckon the buyers by selling off.
Frankly, traders have been even more aggressive, dare I say impatient, in picking their spots than the news flow might suggest. Which means one thing. Whether it’s prescience or simply wishful thinking no one yet believes the central banks have gotten meaningfully out of the market manipulation business.
As far as Italian bonds go, there’s palpable relief. 10Y yields are lower by some 10bps and the BTP-bund spread snapped back after the rather harrowing blowout on Monday, hitting its tightest levels of the day following a block trade in IKM8 3,378 at 132.71 vs RXM8 3,737 at 158.88, that hit at 8:56am in London.
While there’s no real “news” (per se) to account for the relief, that’s probably indicative of the extent to which traders have realized that another couple of days like Monday will invariably engender some kind of verbal intervention from the ECB, so you know, if you know that’s coming, then you need to buy the dip now.
Meanwhile, EM equities and FX have found some respite, bouncing off a rough week as the risk-on sentiment catalyzed by the trade “truce” has taken some of the pressure off, even as 10Y yields in the U.S. have generally refused to budge (i.e., refused to move lower) after falling from multi-year highs on Friday.
But Steve Mnuchin has hardly given the definitive “all-clear” and for proof of that, you needn’t look much further than the lira which is again in free fall.
The bottom line here is that, as the above-mentioned Richard Breslow writes in the same piece cited above, this is a new world:
There is, however, one important difference between markets during QE and now. During the former, everything worked on the assumption of asset price inflation. We are now in an environment where without bottom-up growth, the whole house of cards is demonstrably unsustainable. Yes, many of the recent problem markets have their own sui generis stories. But the larger market concern comes down to growth anxiety fueling questions about debt sustainability and servicing.
If so, refer them to Mario Draghi, who would rather you didn’t make him ramp APP back up to €60 billion/month just when he was planning on tapering it to €10 billion/month from the current €30 billion/month come September, but you know, don’t you fucking tempt him to start spiking this punchbowl again.