Today has been a real capitulation day on several fronts. Equity markets are down, commodities are weak (oil and gas have collapsed), and most sovereign Euro bonds are diving. The US Fed's Mini-Twist response fails to address the slew of issues revealed by yesterday's US economic releases. The recent pledge to bail out Spanish banks has, in the mind of bond traders, already added €100B to Spain's impossible debt burden, and clearly demonstrated that German "style" initiatives are nothing but super sharp double edged swords. As market participants wake up to today's reality, and to make sure that we all know where we are, US banks are subjected to another round of downgrades (at this moment this is only conjecture, but the markets are currently trying to price in this probable eventuality).
So, is there anything positive happening? Yes, we're finally having a purge. Basically, today's price action makes more sense (in the face of negative news), than previous market reactions. Political issues have clouded sound judgement for too long, and today participants finally came to their senses and acted as they should have... a long time ago. Now the question is, will they over do it, or will they wake up to find that another government trump is in their hands? Today's capitulation will only be rewarding if there's a middle way.
Just a little update on price action... since the above post was penned in June, global markets have done well and traded within a range, but with plenty of volatility. To say that the price action has not been constructive would be incorrect, but the volatility created by politicians and central bankers is still giving the markets the jitters. Not sure the summer months are best spent "climbing a wall of worry" - but that's what the tape says we've been doing. If the markets exit the summer having digested a slew of bad fundamentals we ought to see a decrease in volatility, and, unless there's a late August/first week of September rout, then volatility ought to decline with markets looking sound (from a technical perspective).
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