Sentiment has been detoriating during the afternoon, especially the European Indices.We are seeing Euro trade towards the low of the session. Both the DAX and Stoxx 50 are breaking out of short term formations to the downside. Let’s see how this trades when we get SPX below 1200 shortly.
Guest Post by MacroStory.
Tuesday we discussed how the Vix was falling but the Skew was rising. On the surface the Vix looked like investor fear was subsiding yet “under the hood” was a different story. If fear was truly subsiding the Skew would not have registered such a large move up as it did on Tuesday.
Wednesday saw a complete reversal with the Skew falling which is reflected in today’s Vix closing price. Remember the Skew shows how volatility is distributed. When the Skew is rising it means investors are buying “tail risk” options or out of the money puts. You could oversimplify and say it’s an early warning of sorts of a pending change in the Vix.
Silvio Berlusconi is expected to end months of speculation and procrastination on Thursday by nominating Lorenzo Bini Smaghi as his choice to replace Mario Draghi as governor of the Bank of Italy, reports the FT. Italy’s prime minister had been caught in a three-way struggle between Nicolas Sarkozy of France, http://ftalphaville.ft.com/thecut/2011/10/20/706961/berlusconi-opts-for-bini-smaghi/
Japan may sell about 1,000bn yen ($13bn) of bonds to fund rebuilding of areas stricken by the March earthquake, Bloomberg says, citing two government officials. The amount is less than estimates of analysts at UBS, http://ftalphaville.ft.com/thecut/2011/10/20/706906/japan-considering-13bn-bond-sale/
Goldman Sachs and JPMorgan Chase issued more than $2bn in new long-term debt on Wednesday, reports the FT, as the banks looked to take advantage of calmer markets and lock in funding from new sources. The http://ftalphaville.ft.com/thecut/2011/10/20/706856/us-banks-issue-bonds-worth-more-than-2bn/
While Equities are doing their own thing, under siege by the HFT Community, let’s review how it all looked back in 2008. We have seen a lot of weakness in Dr Copper lately. Despite the sharp sell offs, the metal has not managed to recover more than a few percentage points. We had a similar situation in 08. The set up looks rather similar, but of course, this time they will quick fix Europe in 8 days, no problem. Chart is rather self explanatory. (Green Copper, blue USD/EUR, orange SPX.)
Another flip flop session. Markets trading on light volume in early European session. Apart from renewed rumors of the mighty EFSF, and actually some vague figures on the EFSF, no real other news to focus on. Meanwhile, below some important levels in the ES futures to keep track of. 1185 is the first big support.
How fast things change in just an afternoon. Earlier today when ES Futures traded at 1230, it all felt so good. Just mentioning we would trade below 1200 today, some proclaimed we had lost it, but here we are again. The shorts closed out, the new positive longs, Biggs, freshly long, and the market at levels nobody thought remotely possible this morning. To make it more interesting, Moody’s is delivering some harsh words on France. Remember what we wrote of last Friday, What’s going on in France? Goodbye EFSF. Below from Moodys:
However, Moody’s notes that the government’s financial strength has weakened, as it has for other euro area sovereigns, because the global financial and economic crisis has led to a deterioration in French government debt metrics — which are now among the weakest of France’s Aaa peers.