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

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.