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Volatility Explodes: China, Bunds Crash Then Smash; Dow, S&P500 Tumble Below Key Support Levels

Tyler Durden's picture




 

When Draghi warned traders yesterday that "markets must get used to periods of higher volatility" boy was he not kidding.

The day's absurd vol started first in China, where as noted previously, things first when bump after news a major brokerage was cutting margin for ChiNext stocks, forcing a plunge in both the SHCOMP and the Shenzhen of some 6%, however to prevent the collapse from carrying over and shattering the bubble sentiment ,"someone" stepped in after the break and Chinese stocks went linearly up as if nothing had happened to the tune of another 6%: a 12% round-trip in one day!

 

However, those who hoped this would be the end of volatility hadn't seen anything yet.

Enter Europe, where moments after the market open, German Bunds ignored China's manic close, and focused instead on the panic selling, leading to an aggressive continuation of the previous day's Bund selloff, with 10Y German paper briefly touching 0.99% before quickly finding buyers ahead of what seemed like an inevitable stop flush. As a reminder, this was trading 0.07% bps less than two months ago.

The move led to a just an aggressive selling in the Dax, which briefly plunged at the open, only to promptly recover nearly 2% in losses before closing just modestly lower.

 

The question: was the German bond market leading the Euro or vice versa? The EURUSD had jumped in early trading, pushing the pair up an unprecedented 400+ pips in the past three days alone...

 

... and ironically dragging the US 10Y Treasury along for the ride, nearly tick for tick, not to mention the Bund.

 

In fact, alongside the drop in the USD and the Bund, overnight the 10Y yield initially surged to the highest since early October, only to recoup all daily losses and then some, courtesy of two events:

i) the IMF's slashing of its 2015 US growth forecast to 2.5% coupled with calls for more QE provided a bid into US paper

ii) early in the afternoon by news which we had predicted would happen, when Greece admitted it is out of money and would be unable to make its €345 million payment to the IMF tomorrow, sending risk scrambling for cover.

And while until recently stocks, which as we noted earlier, had been living in a volatility world of their own...

... had been largely ignoring, and certainly taking in stride, all news related to the deteriorating Greek situation, today they finally paid attention, and the immediate result was a plunge in the DJIA which not only finally lost the key 18,000 psychological support level from which it had rebounded on so many occasions since mid-May, but closed at one month lows.

 

And while the Dow finally dipped under 18,000, so the S&P finally tumbled beneath its own psychological support level of 2100 on heavy volume.

 

This, despite the best effort of a seemingly rabid VWAP algo (thank you Citadel) that went berserk moments before the close pushing the ES nearly 10 points higher in the span of minutes, and scrambling to push ES to less than one point of 2100 and VWAP.

 

The Dow and the S&P weren't  the only things that failing to break higher, had no choice but to slide lower: after repeatedly trying to break into the mid-$60 range, WTI finally gave up and briefly dipped under $58. Should Crude slide one more dollar and take out its own 1 month support, then then the path to $50 or below is clear. In fact, tomorrow's OPEC meeting during which production is expected to remain constant if not increase, may be just the selling catalyst.

 

And while volatility was raging across all asset classes, one place where vol was strangely absent was gold and silver. Here, the only prevailing sentiment was that of constant, relentless selling.

 

And now we turn our attention to tonight's upcoming China session where, if volatility is cumulative, we should see some truly dramatic manic-depressive fireworks and, of course, tomorrow's NFP session where anything in the 250,000 and above NFP range, and all key moving average support for the S&P will suddenly be in jeopardy. On the other hand, a complete collapse in payrolls - and US economy in general will be just the short squeeze catalyst that margins out Yellen Capital LLC.

 

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Thu, 06/04/2015 - 16:13 | 6164184 NoIdea
NoIdea's picture

Dow surged immediately after the close and is well above 17900 again. Everything is fixed

Thu, 06/04/2015 - 16:17 | 6164193 Kaiser Sousa
Kaiser Sousa's picture

of course it did..

http://www.livecharts.co.uk/MarketCharts/dow.php

cant have the DOW JONES PROPAGANDA INDEX suffer a 1% loss now can they....

fucking bullshit day after day...

Thu, 06/04/2015 - 16:20 | 6164215 Haus-Targaryen
Haus-Targaryen's picture

I'll keep covered shorting the AG/AUEUR position all day long.  

While I am not doing much with the trade ATM, I see a explosive upwards potential in the near to medium term.

Oh yeah, all you suckers who emotion-trade.  Go long CAT, definitely a good idea.  

Thu, 06/04/2015 - 16:23 | 6164232 Kaiser Sousa
Kaiser Sousa's picture

the real suckers r the suckers trading at all...

nobody with the physical forms of theonly 2 forms of real money gives a shit about this shit show...

just lettin' u know...

trade on...

Thu, 06/04/2015 - 18:50 | 6164716 MonetaryApostate
MonetaryApostate's picture

It's too damn hot to jump into that pool... whoosh!

Thu, 06/04/2015 - 17:09 | 6164382 Kaiser Sousa
Kaiser Sousa's picture

"The head of Russia’s Central Bank is determined to increase the country’s gold reserves to its previous levels in 2012-2013, from $360.5 billion up to $500 billion. Russia will increase its gold reserves by up to $500 billion, said Elvira Nabiullina, the head of Russia's Central Bank, Rossiyskaya Gazeta reported.

Currently, Russia owns $360.5 billion worth of gold reserves. The amount covers more than three months of imports, short-term foreign debt and 20 percent of Russia's entire money supply. The country's gold reserves exceeded $500 billion during 2012-2013, when global oil prices were at their peak. However, right now due to low oil prices, the Russian budget will receive $150-170 billion a year compared to a few years ago before the crisis.

"Recent experiences forced us to reconsider some of our ideas about sufficient and comfortable levels of gold reserves," the head of the Central Bank said, adding that the Russian economy needs the amount of gold reserves to be able to cover negative capital outflow for the next 2-3 years. Russia will accumulate its gold reserves gradually in order to avoid high inflation, Nabiullina concluded."

http://sputniknews.com/business/20150604/1022941140.html

keep trading that paper Gold and Silver....while us "suckers" keep stacking the real thing...and thanks for the discounts...

Thu, 06/04/2015 - 19:03 | 6164764 tarabel
tarabel's picture

 

 

I sitll don't get this fixation on the size of a country's gold reserves. Are you, as an individual in any country, ever going to be allowed to so much as breathe on a single bar of this stash?

No. These assets are earmarked as a collective 401k for the leadership cadre.

Is any country ever going to stop providing play money for their citizens to use in place of real money?

Put yourself in their shoes and you know what the answer to that is as well.

Gold and silver will never regain their rightful place in the cosmos until AFTER everything has crashed. At that time, it will be discovered that all of the vaults have been "robbed" by parties unknown and forever unknowable.

Thu, 06/04/2015 - 16:23 | 6164219 angel_of_joy
angel_of_joy's picture

After close don't count. There is only minimal volume and plenty of time for the "after" market to go anywhere it chooses. Derek from the PPT went AWOL at the worst time possible. This will be dully noted in his next performance appraisal...

Thu, 06/04/2015 - 16:25 | 6164245 Traderone
Traderone's picture

96,000 ES cons went thru' in the last 5 mins before close BUT 60,000 in 5 mins after the close, i'd say that is pretty heavy volume dude.

Thu, 06/04/2015 - 16:33 | 6164270 angel_of_joy
angel_of_joy's picture

Then why don't you get in and buy some more ?

Thu, 06/04/2015 - 16:44 | 6164306 Traderone
Traderone's picture

No need for the blown gasket Charlie.

Thu, 06/04/2015 - 18:55 | 6164736 tarabel
tarabel's picture

 

 

The dude always cracks me up-- the cynical, mean, ever-negative "Angel of Joy".

He's like an SNL skit from the early days.

Thu, 06/04/2015 - 16:22 | 6164227 Traderone
Traderone's picture

Did you see that shit? holy moley, the Nasbaq went vertical for 200 pts in 25 mins straight into VWAP as did the ES . 'kin 'ell. Late day shorts were ripped a new asshole once again

Thu, 06/04/2015 - 23:49 | 6165563 JoWazzoo
JoWazzoo's picture

Yeah - I was watching SPY and same shit.  Just at the close WHOOSH and following thru into extended hours..  That effing shit HAS to be PPT.  All sorts of markets too - IWM, SPY, futures, etc.

Thu, 06/04/2015 - 16:31 | 6164259 TheRideNeverEnds
TheRideNeverEnds's picture

Investors are faced with the age old dilemma of market timing.

You could buy now knowing that while you don't know exactly when or where they will unveil the next QE you know for sure they will and the market is guaranteed to go higher.

On the other hand you could wait to see if we sell off a few more percent and buy then at better prices before they unveil the next round of QE.

Now if history is any guide the 'market' will go down a maximum of 5% before the FED comes out and tries to talk it back up. If that fails and we manage to go 10% or more down then the next round of QE will be imminent and waiting to buy becomes much more risky because when they do announce the next round you will likely have less than a week before the market is back to making new all time highs daily.

Thu, 06/04/2015 - 16:38 | 6164274 Keltner Channel Surf
Keltner Channel Surf's picture

Given the 3:45 standard VWAP push failed for many big ETFs, could be algos were 'takin' care 'o' business' after-hours, and the impact won't last, though I suppose some houses may think tomorrow's JOBS rpt could be weak enough to make today's foreign-inspired swoon a buy.  In fact, any disparity between JOBS-positioning machines (that we might assume were workin' all week, given the yo-yo patterns) and Greece/euro reactions could make for quite a day tomorrow if we get an outlier.

Thu, 06/04/2015 - 18:19 | 6164598 Kirk2NCC1701
Kirk2NCC1701's picture

In the current Western system, it's not "Volatility" till it's on the evening news. [sarc and serious]

You're gonna need a LOT bigger Financial Cannon/WMD, to make Wall St quake.  Until then... it's just noise and click-bait. [serious]

Thu, 06/04/2015 - 16:15 | 6164197 stormsailor
stormsailor's picture

some dumbass in the server room yanked the wrong patch cord.  duh.  like the makets will ever go down again.

Thu, 06/04/2015 - 16:15 | 6164199 ...out of space
...out of space's picture

naomi prins explane volatiliti in the vid people dont have any money on youtube

Thu, 06/04/2015 - 16:16 | 6164203 Hype Alert
Hype Alert's picture

Anybody watching the flag on the SPY?  Looks like it broke out to the downside today on good volume.  Not sure if that matters in a centrally planned market.

Thu, 06/04/2015 - 23:59 | 6165584 JoWazzoo
JoWazzoo's picture

Based on traditional tech analysis, yeah.  That and 2,100 got taken out.  But who the eff knows these days.  Jobs report will be key tomorrow - one way or the other.  But we may be getting close to bad news is viewed as bad news.  I dunno - I just observe and react - gave up on thinking before trading.

Thu, 06/04/2015 - 16:16 | 6164205 Keltner Channel Surf
Keltner Channel Surf's picture

Bowie does Draghi         from “Space Oddity”

Plunge Control to Major Draghi:  Take your happy pills and on turn the spigot on
3 … 2 … 1 … Lift-off

This is Plunge Control to Major Draghi:
You've hardly made the grade       
And the Germans want to know whose loss they’ll share
Now it's time to print more money, if you dare

This is Major Draghi to Plunge Control:
I'm hearing cries of ‘Moar !’
The euro’s floating in a most peculiar way
And the DAX looks very different today

For here am I printing like Bernanke, flying above the world
The helicopter’s blue, and I’ve got more work to do

Though I've tossed 200 billion euros, they haven’t had their fill
And I hope my markets know which way to go
Tell the Greeks I hate them very much (they know)

Plunge Control to Major Draghi:
Your market's red!   There's something wrong …
Can you hear me, Major Draghi?  Can you hear me, Major Draghi?   Can you ... 

... here am I crashing with my big plan
Bond yields to the Moon 
Merkel’s face is blue, and The Piper’s payment’s due

Thu, 06/04/2015 - 16:20 | 6164218 commishbob
commishbob's picture

"Chinese fireworks."

Well-done.

Thu, 06/04/2015 - 16:23 | 6164230 mtndds
mtndds's picture

Rigged.  Tomorrow the DOW will be above 18000.  NFP will be below what everyone is expecting and the market will feel like the FED will have to hold off on raising rates. Rinse and repeat.

Thu, 06/04/2015 - 16:24 | 6164235 ...out of space
...out of space's picture

WTI finally gave up and briefly dipped under $58. Should Crude slide one more dollar and take out its own 1 month support, then then the path to $50 or below is clear. In fact, tomorrow's OPEC meeting during which production is expected to remain constant if not increase, may be just the selling catalyst.

 

Look at a russin ruble. it start to go lower again

Thu, 06/04/2015 - 17:10 | 6164397 John Law Lives
John Law Lives's picture

If the Saudis (and others) are determined to crush their US shale-oil opposition, it would seem logical for OPEC to keep the oil flowing at current levels (if not increasing it).  As it is, Brent Crude rallied back to the $60s whilst OPEC kept right on pumping.

Thu, 06/04/2015 - 17:38 | 6164473 Turin Turambar
Turin Turambar's picture

I think this is the case. That's why I'm long SCO atm. Already up 11% in 2 days. Gotta play along with those who rig the markets. Still, it's nerve wracking.

Thu, 06/04/2015 - 16:43 | 6164305 Goldbugger
Goldbugger's picture

 A traders dream, just gotto know when to fold em.

Thu, 06/04/2015 - 16:45 | 6164310 behind the curtain
behind the curtain's picture

My Gold and Silver is still sitting in my drawer .. same spot .. hasn't moved ..

Thu, 06/04/2015 - 17:51 | 6164513 ArtOfLife
ArtOfLife's picture

And I still have the same amount of Berkshire shares. High five.

Thu, 06/04/2015 - 17:30 | 6164451 zeroaccountability
zeroaccountability's picture

No VOL in gold and silver....hmmmm....now that's strange.....oh wait....

Thu, 06/04/2015 - 18:38 | 6164669 fremannx
fremannx's picture

Dow Theory has been predictiong a coming crash for months. NO one wnats to see it... but the signs are there... like it or not.

http://www.globaldeflationnews.com/dow-jones-industrial-averageelliott-w...

 

 

 

Thu, 06/04/2015 - 18:56 | 6164740 MPS4
MPS4's picture

Seriously, Elliott Wave???  Bwahahahahaha! That shit is a joke.  My wife changes her mind less that those quacks.  Save yourself the hundred bucks.

Thu, 06/04/2015 - 20:49 | 6165087 biggestbrother
biggestbrother's picture

The BOND non-market THE BOND market policies will be the next SUB PRIME. 

Stuff with Sub prine - crisis

stuff with the Bond market - crisis. 

 

Easy peasy 

Thu, 06/04/2015 - 23:32 | 6165536 polo007
polo007's picture

According to Voya Investment Management LLC:

https://investments.voya.com/idc/groups/public/documents/market_commenta...

The Outlook for Monetary Policy and Long-Term Interest Rates

Though there are many reasons for low long-term interest rates, it is useful to classify them into two sets: domestic factors and international factors. The main domestic factors are low short-term interest rates, low inflation and low inflation expectations, contained volatility in financial markets, tepid rates of economic activity and the increased size of the Fed’s balance sheet. The main international factors are low overseas interest rates, low inflation and deflationary expectations abroad, quantitative easing in major advanced economies and slow growth in the rest of the world. Domestic factors are the primary drivers of low interest rates in the U.S., while international factors have provided additional impetus.

It is well established that long-term interest rates are strongly correlated with short-term interest rates (Figure 9), a relationship that has been understood since at least the middle of the 20th century. Short-term interest rates are principally driven by the central bank’s policy rates and other monetary tools. The Fed has kept the fed funds rate below 25 basis points since December 2008, resulting in extremely low short-term interest rates, as indicated by the low yields of three-month and six-month U.S. Treasury bills.

Long-term interest rates are likely to stay low as long as short-term rates remain low. The recent, moderate selling trend in two-year U.S. Treasury securities implies that investors expect the Fed to hike its target rate. However, rates on three- and six-month T-bills have not risen much, suggesting that while an imminent rise in long-term rates is not yet priced, investors are pricing in a modest rate hikes afterward. Observed inflation and inflationary expectations also are important drivers of government bond yields. Low core inflation suggests that long-term rates will stay low.

Volatility in financial markets also affects long-term rates. The VIX and MOVE indices — measures of volatility for the stock market and the government bond market, respectively — have stayed fairly low. Volatility in the government bond market has increased a bit recently but is still low by historical standards. The size of the Fed’s balance sheet and Fed monetary policy actions can have substantial effects on long-term rates. While the large-scale asset purchase program has ended, the Fed will remain a large holder of U.S. Treasury and agency residential mortgage-backed securities even after it begins to hike (Figure 10). This large stock of Fed holdings is likely to restrain upward pressures on long-term rates by limiting the market supply of these securities.

International factors also have restrained long-term rates. Global price pressures are feeble. Inflationary pressures in the major advanced countries are subdued. Long-term rates are low in advanced countries such as Japan, the U.K. and Canada. Interest rates on short-term and intermediate-term government debt instruments are often negative in the euro zone and Switzerland. Japan has experienced long-term rates of less than 2% since the late 1990s. Compared to long-term rates in the major advanced countries, U.S. Treasury yields are markedly higher! What’s more, the European Central Bank and the Bank of Japan are likely to remain in quantitative easing mode at least for the rest of the year, if not beyond. Foreign demand for U.S. Treasury securities is extremely strong — China and Japan, for example, continue to hold large portfolios of U.S. Treasury securities for mercantilist and other purposes — and there is no reason to think that this will change anytime soon.

Summary

The combination of domestic factors and international factors supports our view that low long-term rates will persist. The U.S. economy continues to improve, albeit at a slow place. Job growth has been decent for the last few years and the unemployment rate has declined steadily. Auto sales have picked up. Crude oil prices have fallen dramatically from the elevated levels of recent years, to the benefit of consumers. Rising equity and house prices have enabled households to repair their balance sheets. Businesses have started to invest in equipment and software and building.

Nevertheless, the pace of growth is still disappointing. Labor productivity growth has been weak. Recovery in housing construction has been slow. Wage growth is tepid, as job growth has occurred in low-productivity sectors and industries in which wages tend to be low. Real median income for U.S. households is still below peak. Income inequality continues to increase. Labor’s share of national income is at a low point. Post-crisis income gains have been confined to the very top of the income distribution. Global conditions for growth are still unfavorable, which matters to the U.S. not only for trade but also for capital flows and migration. Slower growth abroad will diminish the prospects for exports.

The Fed, meanwhile, is likely to be cautious and gradual in raising the policy rate, and its balance sheet will stay expanded. The Fed has communicated that monetary policy will stay accommodative for a long time even after an initial rate hike and a few subsequent moves. The combination of tepid economic growth and low inflation domestically, weak global economic growth, strong demand for safe assets and the accommodative stance of the Fed could lead to the persistence of low long-term interest rates in the U.S. for much of this year.

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