Cudmore: "It's Now A Matter Of When, Not If, Markets Break Down"

After yesterday's sudden last hour swoon, in which the DJIA tumbled over 200 points after the FOMC Minutes, the biggest intraday reversal in 14 months, suddenly the bears - especially those who until recently were on the fences - are getting more vocal, such as Mark Cudmore, Bloomberg's former FX trader who this morning writes that "it’s now a matter of when, not if, markets break down into a proper bout of risk-aversion." As for timing, he sayd that "we’re debating the hour rather than the week."

His full note:

The Markets Have Made Their Negative Feelings Clear

It’s now a matter of when, not if, markets break down into a proper bout of risk-aversion. As for timing, we’re debating the hour rather than the week.

The catalyst might be headlines from the Trump-Xi summit, or the ECB’s comments, or it might be the labor report tomorrow, or something else entirely. It doesn’t matter. Markets have made clear which way they want to go, they just haven’t picked which catalyst they’ll blame.

It’s not about where assets are priced today -- the key levels have still not broken -- it’s the path they followed to arrive there. After the strong ADP jobs report, equities rallied, Treasuries fell, the yen slumped, etc. The moves were powerful enough to squeeze out weak risk-asset bears and breed complacency among bulls.

Then the Fed minutes were delivered. The reversals were sharp and just at the moment when nobody was thinking of the downside to risk assets. This means the market will have to chase these moves. But not aggressively quite yet -- most traders will now be nervously watching the ranges and counting on them to hold again.

The key remains the 2.3% yield level in 10-year Treasuries. With the Fed intimating that balance sheet reduction may come sooner than investors expected, thereby potentially reducing the pace of rate hikes, that market is fundamentally fragile as well.

It’s tempting to argue that, no matter all that has been thrown at markets in recent months -- from a Fed hike to the failure of the health-care bill -- the ranges still hold. It’s this attitude that has only raised their relevance and increased the likely volatility when they cleanly break.

I’d be surprised if the levels survive Thursday, let alone until the weekend. The tide has already turned and we’re soon going to see who is swimming naked.