Suffice to say investors, traders and algos were not enamored with the combination of more drama in Hong Kong and an absolute meltdown in Argentina.
It was risk-off from start to finish in the US on Monday as Treasurys and the yen benefited from the flight-to-safety triggered by political tumult and the promise of a fresh Argentine debt crisis.
10-year yields in the US tumbled, flattening the 2s10s inside 6bps, the tightest since 2007. 30-year yields touched a YTD low of 2.118%. Analysts are rushing to adjust their forecasts. UBS cut their year-end target for 10-year yields to just 1.25%, and Morgan Stanley trimmed their outlook as well. Yields are down some 40bps this month alone.
USDJPY is gunning for the January flash crash lows, and intervention talk is heating up, although most seem to believe the pair would have to make a run at 100 before Japan would step in. “A move below 105 would put USDJPY below the corporate breakeven rate for four of the 17 industries surveyed by the Cabinet Office, while moves below 100 and 95 would do the same for nine and 16 of those industries, respectively, suggesting verbal intervention could strengthen gradually as levels fall to 105 or lower”, Barclays said over the weekend.
Argentina’s peso plunged and the Merval index dove the most ever. There really are no words to describe the losses in Argentine equities on Monday.
If you can find an adjective for this situation, your vocabulary is far superior to ours. “Argentina will very likely default”, Wells Fargo’s Brendan McKenna wrote, in a Monday afternoon note.
Getting back to the US (because spending too much time trying to sort through the smoldering wreckage in Argentina is enough to make one nauseous), 10-year real yields are on the verge of turning negative for the first time since 2016 (bottom pane).
And, again, 2s10s hit a fresh cycle low (top pane).
Ultimately, US equities could not digest the combination of a relentless safe haven bid and the geopolitical turmoil – not at a time when the threat of another engineered downdraft in the yuan lingers (the PBoC’s apparent desire for stability notwithstanding) and Donald Trump could shake things up at any time with a tweet. 1% moves in either direction for the S&P are becoming commonplace again as uncertainty reigns.
And the VIX put up its second-largest one-day gain since the May selloff, just a week after rising 7 vols on the heels of the yuan devaluation.
Bottom line: People are nervous, liquidity is thin and it looks as though markets are going to need more than a stable CNY to calm down after the events of the last two weeks.