Today was a day that the financial markets used to have back in 2008.
It was a fairly quiet start to the European trading session which was dominated by a poor German 10yr Bund auction which saw German 10yr yields hit 1.675% at the end of the morning session.
There had been some US Investment Bank buying of Spanish 10yr bonds, I would say Goldman, and some US Hedge funds buying Italian 10yr BTPS versus selling 10yr Bunds. Some hedge funds are rumoured to have paid for independent polls for the upcoming Italian elections this weekend.
It was the commodity markets that were about to grab the headlines as the Metals market continued to slide throughout the day even as European equities traded positively. Copper was down 0.25% at the US open but fell 1% as the US equity markets opened. The bigger move came around 60 minutes later when WTI Oil fell $2/bbl . Dealers scrambled for a reason to this and a rumour circulated that a Commodity fund was in financial trouble and had been forced to be liquidated. No Fund has been named as the culprit and therefore I would say that it is just a continuation of what we have seen over the past few sessions where commodity funds, facing redemptions, are selling into a market that just doesn't have the capacity to buy anymore.
Further price falls occurred across the board taking most commodities through technical support levels. It appears that there were very few shorts in these markets and stop losses were hit across the sector.
At first equity and currency markets held up but they became under pressure into the European close.
There remained a number of long risk positions that have been flushed out into the US close however. The minutes from the January Federal Reserve meeting were a bit ambiguous as to ongoing Fed policy. The Fed's assessment of the economy was more upbeat then its December assessment but the Fed minutes, following on from the UK's MPC minutes this morning, show that the voting members are at the least undecided on what to do next!.
US Treasury markets initially tried to weaken on the FOMC minutes release. This is a factor of the large short base that is still in the market. However as equity markets slid US Treasuries began to rally. It should be noted that it was Mortgages that declined initially as dealers tried to suggest that the FOMC minutes suggest that the Fed's QE policy will be shortened ahead of schedule. Reading the minutes it seems this is highly unlikely. But what has occurred is a spike in Implied Volatilities, especially in Risk assets. The VIX closed up 2.3 points, but still way below where it should be.
US Equity markets are down between 1.5% and 0.75%, and after hours are continuing to slide.
The Euro is down 1c at 1.3280.
But Oil is closing down 2% and US$ Gold 2.5%
What to expect tomorrow.
The US S&P Equity market fell 1% after the European close- and with commodities down I would think that Asia will be a very volatile and nervous trading session. With the recent strength in Japanese equity markets I would suggest that these will suffer the most. This should therefore knock on and create a very poor European equity market open tomorrow. This should see the Euro weaken further, a move below $1.328 would open up a technical move to the 100 day moving average of $1.3117.
A move here would see peripheral bond yields under pressure. 10yr BTPs futures if they open up, as I would expect, below 111.80 could and should see a test of the 110.00 area and a fall in 10yr BTPS to 106.80, or 4.67% from the current 4.41% level.
This for me would be supportive for flight to safety markets again. German Bunds, US Treasuries and Gold will find favour again.
Let's see how it develops.