It’s been rough sailing for the market over the past three weeks. We have seen three straight weekly declines, and declines in six of the past seven weeks, in the major indices.
Sentiment is just about as poor as it has ever been, with new record levels in put option ownership from the largest investors (in dollar terms) and investor sentiment surveys plumbing all-time lows.
The feeling that seems to permeate Wall Street is that of waiting for the next shoe to drop following the failure in the UK pension system earlier this month. Pension funds in the UK were holding leveraged swap contracts collateralized with UK Gilts at the long end of the curve.
When UK bonds started to dive off their latest fiscal stimulus bill (which came with 10% UK inflation), those swap deals hit thresholds and triggered a cascade of margin calls, which could only be met by selling more Gilts.
Investors are asking themselves how many other major international markets are booby-trapped by trading strategies that can’t handle a little more volatility in bonds? What’s going to break next?
The upshot is the odd phenomenon of the BoE doing QE and QT at the same time, while it pretends it is still ready to be tough on inflation. Talk about losing credibility.
The upshot is also the continued threat of a parabolic rise in the US Dollar, which puts a strain on global growth and the ability of emerging market debtors to service dollar-denominated notes and bills.
Next up for the market is the beginning of Q3 earnings season, where the rubber will seriously start to meet the road. MX, META, MU, NKE, and RCII all provided dire warnings about upcoming results and the operating environment in play.
Consumer spending has started to drop precipitously. Questions are being raised on the valuation front as earnings get set to roll out.
Questions — and rumors — are also swirling about the potential for a major bank failure, with Credit Suisse (NYSE:CS) in the spotlight. Read More…
The sentiment backdrop, the rumors, the pessimistic expectations for upcoming earnings — it all adds up to an environment laced with fear. But it also adds up to an interesting context for contrarian success if each aspect of this equation were to work out better than expected.
We start October with Great Things Afoot. Fortunes will be made and lost. Fasten your seatbelts!
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