The best word I can find to describe what happened yesterday in the markets is frightening. From about 2:40 to 3:00 pm et, it literally felt like the world was ending, eerily reminiscent to what the markets experienced in the 3rd and 4th quarters of 2008 and the 1st quarter of 2009. Specifically, the Dow Jones Industrial Average was down roughly 1000 points or 9.0 percent during that time, the biggest intraday move on record, and was on a path towards a complete market crash. Fortunately, equities rebounded in the last hour of trading with the Dow finishing down 347.8 points. As strange as it sounds, that -3.2 percent decline felt like a victory. There are many stories and rumors circulating as to the cause of the move. Some reports suggest that an erroneous trade was input by a Citigroup trader who mistakenly typed “B” for a billion shares, rather than an “M” for a million shares. Apparently his fat fingers aren’t proficient on the keyboard. Unfortunately, this trade sent the market lower setting off an explosion of algorithmic, computer based sell orders. This in turn, coupled with the Greek and European contagion fears, triggered more selling until bids came back into the market. Regardless of the reason for yesterday’s action, the reality is that anxiety is ubiquitous once again, and I believe it is safe to say that after 13 months of rallying, perhaps the long awaited correction is underway. How deep the correction will be is anyone’s guess. Futures are pointing to a stronger opening this morning, so it will be interesting to see how things shake out.
Concurrent with the sell-off, the VIX, widely regarded as the “Fear Index” and a measure of expected future volatility in the S&P 500, spiked by 60% intraday and closed at its highest level since June 2009. The U.S. dollar also continued its ascent as the Euro declined, while U.S. treasury yields declined to their lowest levels since December. Gold also moved higher and one trader suggested that yesterday was the day that Gold officially became a currency. At the end of the day, yesterday can only be categorized as a bizarre day. The question is, was this an anomaly or a harbinger of things to come.
On the Greece front, despite violent protests by its people, the Greek government voted in favor of the austerity measures. This sets the stage for the Germans to vote on the aid package today. Many expect the Germans to provide full support, providing a modest lift to the Euro this morning. While the ECB did not act at yesterday’s meeting, many expect it to potentially lower rates and commence a large scale quantitative easing program to calm the markets across the Atlantic and restore confidence. Stay tuned as I’m not convinced this will happen. The ECB had the opportunity to act yesterday and fell remarkably short.
On the economic front, The U.S. gets the full employment report at 8:30 am et. Stronger numbers could provide the catalyst for equities to fight back and close the week on a positive note. The street consensus is for non-farm payrolls to add 190k jobs. This would be the best reading since March 2007 and could go a long way in validating our recovery.
On the fixed income front, as hard as it was to be nimble enough to take advantage of a day like yesterday, we had numerous clients sell into the treasury rally. This was a good play as treasury yields are higher this morning. Fixed income spreads have widened across the spectrum to their highest levels versus treasuries in a long time, providing an opportunity to add some riskier assets to the portfolio (i.e. mbs, munis, corporates, agencies, etc.)