Italy Sparks Market Bloodbath: Financial Stocks Collapse

Tyler Durden's picture

So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €5 billion in 1 year Bills into what may well be a bidless market.


Unable to scramble back to VWAP, the buy-the-dippers faced some uncomfortable reality today in equities as we closed near the lows of the day in ES (on heavy volume). Financials dropped over 5.5% with some of the majors (MS, GS, BAC) and Minors (JEF) stumbling very hard. The biggest drop in financials in over two months (and ES also!) was the worst performing sector as equity markets retraced more of that richness relative to credit that has been hanging over this rally's head. Wherever you looked there was pain with Copper smashed lower (along with silver and less so Gold) as the dollar tore higher after EURUSD fell over 330pips from its morning highs.

ES managed a small pull off the lows into the close but remained well south of both VWAP (light blue) and CONTEXT (dark blue) as volume was 30% above average by the close.


A one-day drop in the Financials ETF of over 5.5% is the most since the early August chaos.

And as usual, this is what happens when too much faith in central planning meets reality:

But it will get worse: unless the ECB steps in early and forcefully tomorrow, this is coming:

Away from stocks, credit was even more aggressively sold off (just as we saw in Europe this morning) with HY crushed - which will implicitly drag our expectations of equity market's relative-value down also.

We have been very vocal at the pump-and-dump we suspect has been going on in the HYG ETF and its underlying HY cash market and today saw HYG dramatically underperform at the close. It seems perhaps (once again) that the liquidity hedge prefernce shifted back to HYG (the high yield bond ETF) after HY17 (the suppoosedly liquid credit derivative index) dried up.

And then HYG also cracked lower into the close relative to SPY...

While taking advantage of this disconnection may seem simple, we suspect that HYG was simply the easiest place to set out hedges as we accelerated weaker into the close and every other market dried up. We discussed this at length last week and especially note that we were growing worried about the exuberance in the HYG and the HY bond advance/decline line.

The 'save' in Oil early on (around the report and the EU close) along with the weak auction in 10Y TSYs probabaly supported ES more than otherwise as broad risk assets did not drop quite as dramatically. TSYs closed well off the low yields of the day but were still down for the day quite handily. VIX blew back out as did implied correlation as macro overlays were grabbed at whatever cost for liquidity. Gold remains  up 0.8% on the week but gave back some today with Silver just negative on the week now. The
dollar strength and equity weakness combined to drag us back to -3% YTD
in terms of constant USD purchasing power (and -2.27% outright in the

Charts: Bloomberg

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Mister Ponzi's picture

Time for the deer, bitchez!

Dr. Engali's picture

I shot one with a bow last week. It gave me the same look.

Dr. Engali's picture

Getting junked by a bunch of people who have no problem eating burgers from McSlaughterhouse.

john39's picture

no animals were harmed at mcslaughterhouse...   soy doesn't scream.

Pladizow's picture

"You can ignore reality, but you cant ignore the consequences of ignoring reality"

- I think this quote is either Ayn Rand or Snooki discussing her herpes.

camaro68ss's picture

O shit, the deer is out. What happend?

TruthInSunshine's picture

A gaggle of 401(k) sheeple on the loose (already chipped & ear tagged), that need rounding up before the next culling/sheering:

Cdad's picture

Lol...the fucking deer.  I cannot help laughing like an idiot every time I see that pic.

What a great fucking day today, no?  Drinks are on me.

A grateful Cdad

redpill's picture

Do it roaring 20s style, try a Sazerac!

TheSilverJournal's picture

The USD is in much worse shape than the Euro. The only solution in the US and Europe is the printing press. A silver breakout is in the works. If countries leave the Euro, it will surely be a test for fiat currencies.

jeff montanye's picture

it's all true except for the part about the printing press.  and that part would be fine if there were quote marks around solution.  won't stop a relatively hairy bear market but it doesn't mean they won't try.

NewThor's picture

Cramer just said American banks will thrive. LOL!

NewThor's picture

Cramer just said American banks will thrive. LOL!

redpill's picture

Probably just a technical glitch with the markets, it can't really be a sell-off.  Every day on Power Lunch they say things are getting better.  So they are, right?

TruthInSunshine's picture

The Bernank is already tackling the vexing problem of E = mc2 (and the downside of contagian, velocity and leverage) in a bold attempt to disprove it or jerryrig a workaround.

smlbizman's picture

if it was not for the berskanke, our, not mine, banks would be penny stocks like the ones overthere......

Mr Lennon Hendrix's picture

Damn Bernanke for keeping the squid alive.

Bay of Pigs's picture

Wait a second, is that Corzine on his knees underneath Blankfeins desk? What's he doing there?

Nascent_Variable's picture

The Bernanke is trying desperately to find a way to move faster than the speed of light, so that he can travel to a planet that won't be filled with angry mobs trying to guillotine him.

jeff montanye's picture

or, rather, to time travel so as to kill alan greenspan's father.  and, perhaps, to pursue an honest profession himself.

kito's picture

Was this a fear based sell off or an excuse to take profits from this cray run up? I would think the former. And if markets are forward looking, wouldnt tomorrows bond flop be built in already? Full disclosure-i hold DOG amd have been getting bitch slapped

Oh regional Indian's picture

it was a bear fased sell-off.

it was a YU 55 based sell-off.

it was a prepping the market for a major dive sell-off.

it was a sell-off.


Paying Attention

Pike Bishop's picture

a 3% move in the equities yielded me +20% on the long VXX (VIX) today. With regression to strip out relative move, and a couple of other variables which inhibit capturing the pure residue/essence of short-term fear.....

That gave me my highest Shitting-of-Pants Multiplier since Japan fucked-with and failed on their JPY, and sent the first tidal wave to the Western asset markets on Aug 4. In fact, it's higher.

The Hedgies want their Dip n Rips to add a point or 2 before the end of the year?

Well, they may not get a tapering sell-volume signal, to buy this bitch back, even though they may think they have one when the time comes..

The primordial inertia of today, was not nearly spent in the selling. This is stronger than anything I've seen in 3 years.

Let's watch.

I Got Worms's picture

I'm looking at the yahoo finance graph of the DOW today, and it shows a 400 pt jump for a split second at 3:00 Eastern - anyone else see that? what is the opposite of a flash crash?

mkkby's picture

Turn off the HFTs tomorrow and let's watch this sucker drill down to the earth's core.

ceilidh_trail's picture

Where's Robo and Harry when we need them???

Raskolnikoff's picture

Gov has to put up a new firewall, looks like team PPT was too busy surfing for porn today and forgot to push the buy button.

Troll Magnet's picture

shit.  no wonder all the porn sites were slow today.  i was wondering why...

mkkby's picture

I never eat at those places but I broke down last week and used a free coupon at Burger King.  I shared a few tiny pieces of "meat" with my cat, and he threw it up.  That shows you how poor the quality is.

Ms. Erable's picture

So your feline friend is apparently not cannibalistic.

Coronal Mass Ejaculation's picture

You don't have to be soy dramatic

achmachat's picture

Believe it or not, over here:
1) hunting with wide dispersion shotgun = perfectly legal
2) hunting with bow and arrow = illegal

Dr. Engali's picture

That's just nuts. I prefer to hunt with a bow. I don't care to hunt with a gun,although I will if need be.

Quantum Nucleonics's picture

how 'bout a 50 cal mounted on a pickup?

tmosley's picture

Or a helicopter.


disabledvet's picture

That's what I hunt people with! Just renewed my license too! Looks I'm only allowed ten this season.

Mr Lennon Hendrix's picture

Can we start calling "bulls", "deers"?  It would seem more fitting.

disabledvet's picture

Yes you can...cuz as anyone whose ever hunted for them will tell you "I shot him five times and he got away."

Spastica Rex's picture

Yes - pre-ground, hemetically sealed meat packets are morally superior to animals you have to kill and prepare yourself. America: if I don't want to know about it, it ain't real.

jeff montanye's picture

last sentence sums up much of the last half century.  maybe a whole lot more.  it may be the human condition.

spartan117's picture

Curious, did you eat the deer?  I didn't junk you btw.

Dr. Engali's picture

Yes I do. I would never kill for killings sake. Hunting is my prefered method for putting meat on the table.  If I figure all my costs in it comes to 40 cents per pound and it's all natural.

o_rly's picture

I respect that. If I could hunt for my meat where I live I would do that. People eating meat from McDonalds or supermarkets are eating meat that most likely came from a suffering and boxed in animal. Hunting deer usually saves them the pain of dying of old age, as long as the properly aged deers are killed, and as long as the hunter is a good shot. 

I don't get hunters who just hunt for sport w/o eating their kill. Sickening.

Dr. Engali's picture

One thing that peolpe don't know is that the meat that they are buying in super markets is injected to enhance both color and flavor. Actual meat looks nothing like that.

Another thing that people don't understand is that if the deer are not harvested they overpopulate and do a lot of civilian damage as well as crop damage.

catacl1sm's picture

and cause human deaths from car crashes.