A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
West Texas Intermediate crude oil prices are below $80 (U.S.), peripheral European debt markets are in full meltdown mode and among the professional hedge fund and mutual fund managers on social media there is real, palpable fear.
Market volatility this week has been caused in part by confusion as to what's really going on. There are, as always in these situations, rumours of hedge fund bankruptcies and geopolitical skullduggery. In the end, I think Business Insider's Matthew Boesler has the best explanation of yesterday's rollercoaster ride in the markets: a massive, immediate unwinding of leveraged hedge fund positions in crude oil and U.S. Treasuries:
"In trader parlance, what we're witnessing, in essence, is one big short squeeze.
Nowhere is this squeeze more evident than in the U.S. Treasury market, which has staged a massive rally alongside the decline in stocks over the last two days.
'It's mostly hedge funds and fast money accounts that have played it from the short side from the beginning of 2014,' says Tom di Galoma, head of fixed income rates sales at ED&F Man Capital Markets."
"All of the turmoil in global markets right now is just one gigantic hedge fund short squeeze" – Boesler, Business Insider
"Hedge funds sideswiped by oil, stocks, credit, merger breakdown " – Bloomberg
"Hedge funds face their worst year since 2011" – Financial Times (subscription may be required)
See also: "Despite washout, hedge funds not bailing on energy" – Larry Fink, CNBC
The Wall Street Journal is reporting "sheer panic" in European equity and bond markets this morning.
"Selloff had also sparked an exodus from bonds and stocks in former euro zone crisis spots, which gathered pace on Thursday. The moves were a worrying echo of the worst days of the region's debt crisis, as investors fleeing riskier debt sought safety in German government bonds.
Italy's 10-year yield surged to 2.71 per cent, the highest in more than two months. Spain's 10-year yield hit a near two-month high of 2.37 per cent. Yields rise as prices fall.
German yields hovered closed to all-time lows hit on Wednesday.
Milan's stock market fell 3.4 per cent, having already lost more than 4 per cent on Wednesday. Madrid stocks slid 3.8 per cent."
"No relief for global stock markets as indexes continue to slide " – Wall Street Journal
In probably the most terrifying theory of the day, Societe Generale believes that European markets may be experiencing a liquidity crisis on par with the U.S. situation in 2007:
"The liquidity crisis many had waited for is unfolding. Theoretically it is an absence of speculators willing to absorb risk, triggering a self feedback loop first identified by Keynes (did my thesis on this). The Fed QE fulfilled this function of risk absorption as did foreign reserves buying long dated bonds."
"Could the liquidity crisis be back" – Kaminska, FT Alphaville
In a related, brilliant but wonky post by pseudonymous Japanese investment banker Cassandra, the unintended consequences of bank regulation are discussed in full. Mainly, global banks no longer carry big inventories of market assets and are not stepping in to support the markets as they used to do, notably in the corporate bond market:
"While everyone does as they did before, they ignore the profound difference in the structure of liquidity, leverage, and the interplay and consequences upon both of risk-model herding and position crowding…Dealers and banks are providing less liquidiity, and warehousing less risk than ever, precisely at a moment in time when the amount of systemic liquidity sloshing about, trading discretionarily on a leveraged basis is highly elevated relative to historical experience."
"The risk that will bite you next is NOT the one that bit you last " – Cassandra Does Tokyo
Bloomberg's Matt Levine wrote a tour de force on the complete unknowability of bank earnings and balance sheets despite the apparent transparency of quarterly profit reports. The FT's Izabella Kaminska called it "the best thing you'll read on banks this year." Key excerpt:
"Bank of America's earnings are a rounding error. If Bank of America's measurement of its revenue was off by one per cent, then that would more than wipe out (or double) its net income for the quarter. If Bank of America's measurement of its assets was off by one per cent of one per cent, then that would more than wipe out (or double) its net income for the quarter."
"Bank of America made $168-million last quarter, more or less" – Levine, Bloomberg View
(Unhelpful) Tweet of the day: "@dkberman There was 9/11. There was Lehman Bros. And then there was Oct. 15, 2014. The bond market never moves likes this: pic.twitter.com/S1U4QE3WvR
Diversion: "Lockheed Martin's new fusion reactor can change humanity forever" – Sploid
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Scott Barlow