Everything Breaks Again: Futures Tumble; Peripheral Yields Soar, Greek Bonds Crater

Yesterday afternoon's "recovery" has come and gone, because just like that, in a matter of minutes, stuff just broke once again courtsy of a USDJPY which has been a one way liquidation street since hitting 106.30 just before Europe open to 105.6 as of this writing:


This comes after futures actually were briefly green for the session earlier in the morning. The catalyst this time, however, is not some US fund liquidating or repositioning or new Ebola pandemic news, but all Europe:


Only this time Europe is once again broken with periphery yields exploding, after Spain earlier failed to sell the maximum target of €3.5 billion in bonds, instead unloading only €3.2 billion, and leading to this:


And the punchline, as usual, is Greece, whose 10 Year is now wider by over 1% on the session(!), to just about 9%.

One-handed golf clap to all those who used other people's money to buy those Greek 5 Year bonds a few months ago.

In short, Europe is a sea of red, only unlike before when the bid for safety was peripheral bonds, this time the puking is also sending the periphery crashing, something we last saw just before Draghi's "whatever it takes" speech, which means that the market has finally called the ECB's bluff and demands that after 2 years of jawboning, that the ECB actually put the printer where its mouth is. Good luck with that.

Let's not forget that oil is also still sliding and we have yet to see some major macro fund liquidate as a result of commodity margin calls. The wait will hardly be too long at this point.

Oh, and we forgot to mention that today Dallas well announce State of Disaster (aka martial law lite) and activate an emergency plan over its third Ebola case. So all those BTFD, best of luck to you too.

Bulletin Headline Summary

  • European equities only see short-lived relief at the open as Greek market rot spreads to the Eurozone core, pushing German 10yr yields to – yet again – record lows.
  • Greek markets continue to sell-off on speculation that Greece’s early bailout exit will be less than smooth. The market turmoil also results in Spain failing to sell their targeted EUR 3.5bln in a longer-dated Bono auction
  • Focus turns to the slew of Fed speakers today, primarily Yellen at 1745BST/1145CDT, and earnings from Goldman Sachs, Google and Philip Morris
  • Treasury rally continues, 10Y trading below 2% while 30Y yield lowest since Dec. 2012 amid concern over global growth and possible economic impact of Ebola.
  • Investors are worried that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if inflation and activity keep fading
  • A second Texas nurse infected with Ebola alerted U.S. health officials to her elevated temperature before flying from Cleveland to Dallas on a commercial airline
  • Lawmakers and health specialists say reversals and missteps mar the Obama administration’s handling of the outbreak -- and fueled calls for the resignation of CDC chief Thomas Frieden, who testifies today in Congress
  • As airpower has failed to dislodge Islamic State fighters from the Syrian border town of Kobani or halt their offensive in Iraq, Obama’s appeals for strategic patience are being challenged by some U.S. military and intelligence officers and diplomats who say more needs to be done
  • It’s futile for the U.S. and its allies to “blackmail” Russia over the Ukraine crisis, Putin said in a newspaper interview; also accused Obama of adopting a “hostile” approach in naming Russia as a threat to the world
  • The ECB agreed yesterday on two acts that officially establish its covered-bond program and lay out how it will be implemented, according to two euro-area officials, who asked not to be identified because the discussions aren’t public
  • Hong Kong Chief Executive Leung Chun-ying said his government is ready to meet student leaders next week to discuss the city’s first leadership election as he seeks to end three weeks of pro-democracy protests
  • EU peripheral yields surge, with Greek 10Y over 8.00%. Asian stocks fall, Nikkei -2.2%, Shanghai -0.7%. European stocks, U.S. equity-index futures fall. Brent crude falls to four-year low; copper falls, gold little changed

US Econ Calendar

  • 8:30am: Initial Jobless Claims, Oct. 11, est. 290k (prior 287k); Continuing Claims, Oct. 4, est. 2.380m (prior 2.381m)
  • 9:15am: Industrial Production, m/m, Sept., est. 0.4% (prior -0.1%); Capacity Utilization, Sept., est. 79% (prior 78.8%)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 12 (prior 36.8); Economic Expectations, Oct. (prior 41.5)
  • 10:00am: Philadelphia Fed Business Outlook, Oct., est. 19.8 (prior 22.5)
  • 10:00am: NAHB Housing Market Index, Oct., est. 59 (prior 59)
  • 4:00pm: Net Long-term TIC Flows, Aug. (prior -$18.6b); Total Net TIC Flows, Aug. (prior $57.7b)

Central Banks

  • 8:00am: Fed’s Plosser speaks in Allentown, Pa.
  • 9:00am: Fed’s Lockhart speaks in New Brunswick, N.J.
  • 10:00am: Fed’s Kocherlakota speaks in Billings, Mont.
  • 12:45pm: Fed’s Bullard speaks in Washington
  • 12:45pm: Fed’s Yellen attends event in Chelsea, Mass.


  • 11:00am: Fed to purchase $150m-$250m in 2024-2031 sector


After yesterday's sell-off in US equities abated ahead of the Wall Street close, European equities opened on firmer footing - albeit this was very short-lived. Greek woes swirled further, as the Greek 10yr yield jumped above 8.5% for the first time in 8 months on continued speculation that Greece's early IMF bailout exit will be less-than smooth. The resulting market turmoil in Greece rubbed off on today's Spanish bond auction, as the Spanish Treasury failed to sell their targeted EUR 3.5bln in 2024 and 2028 debt. The SP/GE 10yr government bond yield has widened in response, wider by 22bps today as the Spanish 10yr yield climbs above 2.3%.

The Euribor curve continues to bear-flatten after the ECB confirmed they are yet to make a decision on Greece's collateral requirements at the ECB, despite discussing doing so as earlier reports suggested the ECB could accept poorer quality collateral in order to access liquidity.


Greek equities have fallen sharply, dragging both Italian and Spanish stocks with it, as a number of Italian banks are stopped out of trade - limit down. Furthermore, lacklustre corporate earnings updates from Nestle and Roche as well as AbbVie turning against Shire dropped blue-chip stocks across the continent.

Corporate earnings updates today include Goldman Sachs, Google, Philip Morris International and Schlumberger all due today.


A resumed decline in industrial metals (Chinese iron ore futures fell 4% overnight) has knocked commodity-based currencies, with CAD, AUD and NZD all underperforming. EUR/USD saw some mild upside after Eurozone Core CPI was revised higher to 0.8% vs. Exp. 0.7%, allowing the pair to reclaim the 1.2800 level ahead of the US crossover. Alongside the downside in European equity futures, the JPY has benefited further, gaining no solace from comments out of BoJ’s Kuroda overnight – who reiterated the Bank of Japan will continue with QQE until their price target is reached.


WTI and Brent crude futures again trade softer, with WTI crude briefly breaking below USD 80/bbl. Energy prices failed to find support in positive Chinese data, which overnight showed Foreign Direct Investment rising 1.9% vs. Exp. -14.0%. Furthermore, Yesterday’s API inventories showed a significant build of 10200K vs. Prev. 5100K. The Kuwaiti Oil Co. additionally appeared unphased by the recent slide in oil, as the CEO reaffirmed that the Co. are to raise production further.

* * *

Jim Reid's dramatic summary concludes the overnight recap

Where do we start this morning? Its tempting to get back under the duvet after a 24 hours like the last one, especially as after a year of renovations, my central heating is still not working properly. Anyway I grew up in a house without central heating so I'm made of sterner stuff. As a starter I think its fair to say that after the US opened yesterday it was not wise to be long Greek government bonds and short US Treasuries. In 10 years the former rose 82bps on the day and the latter fell an incredible 34bps at the lows. It was the worst day for Greek Government bonds since July 23rd 2012 (more on this later) and had the US intra-day move stuck, it would have been the biggest yield move on a % basis relative to the starting yield in history.

However it didn't stick and the story of the day for US treasuries was one of a sharp post retail sales rally, then a flash rally, then a flash crash and then a slow but steady sell-off. At 7am NY time 10 years were sitting calmly at around 2.20% before rallying hard to 2.05% by 9am (post weak retail sales) and then 2% at 9.34am. At 9:38am though they hit 1.86%!!! They then reversed back to around 2.04% 15 minutes later before selling off to 2.14% at the close (currently lower this morning at 2.08%). A wild trip that suggests a large liquidation, capitulation or huge technical trading level breached. In markets that have a lower structural liquidity than pre-crisis these things can happen but something big in positioning must have happened yesterday.

With all this going on one wonders what probabilities you'd get that the Fed actually does QE again before it raises rates. I'm sure if you'd have suggested this a month ago many would have thought that there was more chance of Elvis being found living a relaxing retirement on the moon. As a minimum markets have now priced out a 2015 rate hike from the Fed which seems a sensible response. Our US rate strategist Dominic Konstam hosted a call last night and in it he suggested that a minimum pre-condition for stability was for the Fed to validate the re-pricing of the interest rate curve. Or in other words if they stick close to the message of the dots then to paraphrase Dominic it would be a disaster for risk assets. So we perhaps need to hear more dovish comments from the Fed along the lines of Fischer's remarks at the IMF over the weekend and others like Williams back on Tuesday.

The other (and bigger) problem is clearly in Europe. Before we get to Greece the further collapse in 5yr5yr breakevens suggest a market running out of confidence in the ECB's ability to be able to do enough to arrest deflation. In the pdf today we show the history of this. Before mid-August we had only fleetingly traded below 2% in the 10 year history we have. It did manage to go back above 2% again in early September but since September 9th we've been back below 2% with the move accelerating over the last week. We closed at around 1.75% yesterday having hit 1.70% intra-day. This is a key gauge that Draghi looks at although he did downplay it a little in the last ECB meeting. However whichever variable he looks at this morning its fair to say that he will see a market that is not confident the ECB can deliver anywhere near enough to turn things around.

More days like yesterday will surely produce a policy response soon though. If it were to prompt a fiscal break through in Europe then the market would really like that.

Onto Greece and markets struggled yesterday on the back of ongoing political issues in the country. The Athex closed down -6.3%, its worst day since 29th October 2012, although at one point it was down more than 10%, making it the biggest intra-day drop in six years. At the same time Greek 10Y debt closed the day 82bps wider, its biggest one day widening since 23rd July 2012. Greek assets have been struggling recently as its current embattled government has looked ever more likely to collapse before their official mandate expires in 2016, even as the Prime Minister Antonio Samaras has decided Greece will end its IMF bailout programme in December, 15 months early. The anti-bailout Syriza party has seen its polling lead grow ever larger over the current dominant governing party, New Democracy. The latest poll, conducted between October 9-13 by GPO, put Syriza in a 6.5% lead over New Democracy. A general election will take place if the governing parties New Democracy and Pasok fail to secure 180 votes in parliament - the minimum needed to elect a new head of state in February as the incumbent is set to retire. The Greek PM told the Cabinet yesterday that he still expects elections in 2016 as scheduled and remains committed to his current reform programme. Almost irrespective of the final outcome of current political worries it seems they could well remain unresolved well into Q1 next year with the February vote on Greece’s new head of state the most obvious catalyst for change on the horizon.

Moving on to other parts of the European market it was also a historic day to some degree. The 10yr German Bund and French OAT yields fell around 7-8bps to fresh lows of 0.75% and 1.13%, respectively. European equities endured a difficult day with the Stoxx600, DAX, CAC, IBEX, and FTSEMIB down -3.2%, -2.9%, -3.6%, -3.6% and -4.4%, respectively. It was the 7th consecutive down day for the Stoxx600 and it was also the biggest loss for Italian markets since February 2013. On the other side of the Atlantic, the official close of S&P 500 (-0.81%) also failed to tell the whole picture. The index saw a 2.9% peak-totrough intraday move yesterday which at one point actually erased all of its YTD gains. The VIX index closed at a near 29-month high of 26.25 (crossed 31 during intraday). Interestingly Energy (+0.43%) stocks posted modest gains despite the further drift lower in oil prices. Brent fell 1.5% to test the lows of US$83/bbl into the close and there seems to be little good news going on for the commodity right now. US Financials (-2.0%) were the biggest drag to the market in what was the worst day for US bank stocks in nearly 2 years as low rates raised fears of margin concerns.

Indeed there wasn’t much good news anywhere for markets yesterday. Ebola concerns are also gaining more media focus in the US after second nurse Amber Joy Vinson was tested positive for Ebola in Dallas after nursing a Liberian patient. This raised renewed concerns about the protocols for containing the outbreak and has prompted US officials to call for more aggressive monitoring of incidents where the virus could potentially spread. Data flow failed to offer much relief either. The Fed’s Beige Book reported modest-to-moderate growth conditions but the NY Fed survey fell by 21.3pts in October (second biggest monthly fall in recorded history) whilst Retail sales print were also disappointing (-0.3% mom v -0.1% expected). PPI was also softer than expected which is broadly in line with the trend of prices we are seeing globally.

Asian markets are not surprisingly following the weaker lead from US yesterday. Chinese equities are the only major equity markets trading firmer on the day probably helped by data showing that aggregate credit growth rose to a 3 month high in September. Power consumption in China rose 2.7% yoy in September, which although is an improvement from the negative 1.5% print in August, it is still the second worst reading in the last 18 months. Away from China, bourses in Tokyo, Sydney, Seoul and Hong Kong are down -2.2%, -0.4%, -0.3% and -0.5%, respectively as we go to print. The Nikkei is now at around a 6-month low. The Dollar is weaker against key currencies. Asian credit spreads drifted wider given the broader risk off tone. Bank of China’s US$6.5bn AT1 printed overnight and is now quoted higher at 100.40/100.65 after having dipped below par at the open.

Looking at the data docket ahead we have initial jobless claims, industrial production, NAHB housing market index, and the Philly Fed in the US. Data will still be important but with the current disconnect between what’s priced in and the Fed’s dot plot, we will be increasingly sensitive to any Fed communication in the weeks and months to come. The next key event will be the 2 day FOMC meeting concluding on the 29 October (no press conference scheduled) but well ahead of that we have four Fed speakers today. Fed’s Plosser (1pm UKT) will speak on the economic outlook and will take questions from reporters. Fed’s Lockhart (2pm UKT) will speak on workforce development at a university conference co-sponsored by the Atlanta and Kansas Fed. Kocherlakota’s speech today is “Clarifying the Objectives of Monetary Policy” (3pm UKT) and finally Fed’s Bullard (5.45pm UKT) will speak on US demographics (Q&A available). After all this the focus will be on Yellen as she speaks to a Boston Fed conference on “Inequality of Economic Opportunity” tomorrow so stay tuned for that.

Let's see what the next 24 hours brings!!