Market Recap
Guest Post by Macro Story.
What better way to put today into perspective than the following chart by Zero Hedge. Seems low volume holidays when the bond market is closed is a great opportunity to put a nasty short squeeze on. Today was tough but in 2008 it was about 4 times tougher with an 11% ramp.
Sentiment trader is also reporting today is the first day in the history of the SPY that it rose 3% or more on its lightest volume in a month.
HFT no longer bound by Trade Through Rules
 On October 7, 2011 beginning at 12:03:39.950, a massive surge of quotes in SPY, IWM, DIA and other market index ETFs, along with many symbols in the Dow Jones Industrial Average, caused an overload in CQS that lasted several seconds. This, in spite of a 25% increase in CQS capacity just 3 days earlier to a whopping 1.25 million quotes/second. During this event, Nasdaq quotes into CQS became delayed at least 800 milliseconds (800,000 microseconds). Other exchange quotes feeding into CQS also became delayed.
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CMA Global Sovereign Debt
With markets rallying under siege by a brutal short squeeze, driven by below average volume, below we present the latest Global Sovereign Debt by CMA.
The markets are pricing in an almost certain default event in Greece as the upfront cost of protection peaked at 63% vs. 100 coupon – implying a recovery level below 40% (CMA now assume 32% recovery). The cheapest bonds are trading in the low-to-mid 30% according to CMA DatavisionTM Bonds.
Spreads in Italy widened, trebling from 171bp to over 500bp on September 26th and dipping below 500bp following the German parliament’s approved enlargement of the EFSF. The widening has been gradual throughout the quarter, rather than being precipitated by rating downgrades. Market participants appeared to react to concerns about the high debt-to-GDP ratio and whether austerity packages would be enough to reduce debt.
Short Squeeze
If you still wonder what is going on with the markets this afternoon, review the chart below (presented earlier today). With Short Interest, the squeeze must happen, as the market does not allow “smart” shorts to profit from falling markets, yet.
Full Chartology
The markets have put on a huge rally lately. With correlations at extremely high levls, pretty much all indices have rallied hard, and now start entering the reisistance levels. With short interest at elevated levels, we won’t be surprised if the markets tops out with a false and volatile break to the upside, in an inverted shake out of shorts, before the leg down resumes. For great reading on volatility, check last week’s post from Artemis Capital Management.
Some charts resemble very much the last nasty sell off in 2008. What many forget, is that actually many indices are rather flat compared to mid August levels. We have been building up dynamics for a big move, that should start occuring soon. Full Chartology below.
SPX
All charts below.
Contagion Risks
Vitor Constancio’s speech on Contagion earlier today.
Contagion is one of the mechanisms by which financial instability becomes widespread that a crisis reaches systemic dimensions. The other two mechanisms that constitute sources of systemic risk are the unwinding of financial imbalances and the occurrence of severe macro shocks. [2] I will argue that contagion phenomena play a crucial role in exacerbating the sovereign debt problems in the euro area. As a consequence, crisis management by all competent authorities should focus on the policy measures that are able to contain and mitigate contagion. Several of the ECB’s interventions have been motivated by the need to address contagion, which impairs our ability to maintain price stability in the euro area. By focusing on contagion today, I do not mean to say that other sources of systemic risk do not play any role in the instabilities we are currently experiencing. Quite the contrary. An important role is also played by the unravelling of widespread financial imbalances, which contaminated fiscal balances.
Missteps to Mayhem-Burry
Another great article from a free thinker. Michael Burry on where we are heading. When Burry speaks, you should listen.
In predicting when and how America’s financial collapse would occur, my focus was on the growing importance of the housing sector, the actions of our government, and the response of the private sector. This was not simply a case in which a few early adopters made a lot of money or a few venture capitalists acted badly. The entire economy—consumer spending, jobs, securities market—all depended on home price appreciation.
The amount and types of leverage, the generations-old assumption that housing prices always went up, and broad societal participation in home ownership (with greater than 60 percent of Americans owning a home) all called out to me. Soon I would see financial Armageddon with housing as its trigger point.
When Dexia is solved, go ahead and buy? What happened last time?
What actually happened in 08 when Fannie and Freddie got nationalized? Initially the markets traded up slightly, but that proved to be the last little leg up, before we got the final collapse with Lehman falling shortly therafter. With Short Interest at elevated levels, people must first cover, before the leg down can start. First circle, fall of Fannie and Freddie (and later Lehmans), but this time is different.
Don’t forget, earnings coming up
While the last moms desperately try to buy shares on Merkozys great weekend accomplishment of saving Europe, without a plan, we think it is time to start focusing on earnings. Although it is tempting to only follow News out of Europe and trade stocks, they actually represent something else than purely HFT figures to trade. Companies are supposed to make money, show growth etc. Today we get the first light warning out of truck maker Scania in Northern Europe. The stock is falling and dragging peers with it. They are citing cautiousness among clients appeared suddenly….
News That Matters
Ft.com
As their chief executives gather in Paris on Monday for the annual meetings of the World Steel Association, the steel industry is bracing for falling prices as buyers delay orders because of nervousness about global economic weakness, http://ftalphaville.ft.com/thecut/2011/10/10/696921/steel-companies-braced-for-price-falls/
Canadian oil and gas explorer Daylight Energy has agreed to be acquired by China’s Sinopec for about C$2.2bn. Reuters reports the deal for Calgary, Alberta-based Daylight is for C$10.08 per share, more than double the closing price of Daylight’s closing price of C$4.59 on Friday, http://ftalphaville.ft.com/thecut/2011/10/10/696866/daylight-energy-agrees-to-2-2bn-sinopec-deal/
BNP Paribas and Societe Generale have denied a report that they could seek to raise a combined €11bn as part of a broader European bank recapitalisation plan, says Reuters. Le Journal du Dimanche newspaper had reported that France’s first and second largest banks by market cap would seek about €7bn and €3-4bn, http://ftalphaville.ft.com/thecut/2011/10/10/696761/bnp-and-socgen-deny-recapitalisation-report/
Angela Merkel, the German chancellor, and France’s President Nicolas Sarkozy spelt out their determination to defend the stability of the euro as they met for a bilateral summit in Berlin, the FT reports,http://ftalphaville.ft.com/thecut/2011/10/10/696826/merkel-and-sarkozy-set-euro-deadline/
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