10Y bonds dollar Dow euro europe FX germany italy nasdaq S&P 500


Ciao Bella.

Needless to say, Tuesday was an unmitigated disaster as the panic selling in Italian assets triggered an across-the-board, risk-off move.

So in your best mobbed-up accent…

“If you agree it’s time to buy the dip, fuggedaboutit.”

“But then, if you disagree, also fuggedaboutit.”


According to at least one fund manager who spoke to Bloomberg, what you saw in BTPs was indeed a VaR shock as a spike in volatility led to forced selling. “To start out with, realized volatility on IK1 BTP futures represented a Sharpe ratio of just 0.5, so when volatility started picking up, all the carry traders got out of their positions in unison,” Bloomberg wrote, paraphrasing the manager, who added that “carry trades are unwinding and liquidity is so bad in the market that this is the new normal.”

Two-year yields spiked the most on record:


Things got extremely ugly when the forced selling kicked in, as 2Y yields spiked to 2.70 and 10Y yields hit 3.40.


Lo spread” (which is not “low” anymore) blew out to 2.90:


Worst day for Italian stocks since January 2017:


The financials were crushed as the FTSE Italia All-Share Banks dropped nearly 5% for its worst day since August 2016:


Same thing for the Stoxx 600 Banks:


Remember how volatility was a “made in the U.S.A.” phenomenon after February, leading to a scenario where the VStoxx was lower than the VIX? Here’s a more in-depth U.S. vs. Europe vol. chart from Barclays:


Yeah well, equity vol. is back in Europe and the “normal” state of affairs has been restored:


Speaking of the VIX:

The euro is sitting at a 10-month low:


And options traders are the most bearish in a year:


Financials were crushed in the U.S. as well. The KBW is down some 6% over the past four sessions:


Not helping that situation was the safe haven bid catalyzed by the turmoil outlined above. That flight to safety sent 10Y Treasury yields tumbling a truly dramatic 17bps on the day, the most since Brexit:


Remember this?… “Is The Second Most Crowded Trade On The Planet Getting Squeezed? Yes! No. I Don’t Know, Maybe!“?

Additionally, action in Eurodollars shows traders may be aggressively repricing the Fed and given how stretched positioning was there, that’s likely another squeeze.

Broadly, it was the worst day for U.S. stocks in over a month and you can see in futures where it started to unravel as Europe got going and then unraveled some more as Europe closed:


The dollar rose amid the euro malaise:


The flight to safety meant that the franc and the yen were bid. This is getting ugly for the euro:


Finally, don’t worry too much about Italy because Trump’s keeping an eye on things… with a little help from his Italian soulmate..



1 comment on “Fuggedaboutit.

  1. Anonymous

    Mr. H, could you be so kind as to write something on where you think inflation is headed, please? Know there was something in the Fed minutes about letting it over run a bit, and would love to hear your perspective on it. Thank you!

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