As if the collapse of the Italian government bond market – the world's fourth largest with more than $ 2.2 trillion in circulation – would not be enough to shock investors, a similar development should be equally worrying: a lack of liquidity.
At the same time as Italian bond prices are surging, amid concerns that the nation is picking up on the Eurozone (hence the nickname "Quitaly"), some of the biggest investors in the world have started complaining about the inability to get out of their positions . In fact, bond traders refused to bid on most of the Italian market and parts of Spain, John Ainger of Bloomberg News reported. At one point, the liquidity of the Bloomberg Italy Government Securities, which rises with decreasing liquidity, rose the most since 2007. The issue of liquidity or lack of liquidity has been a problem since the financial crisis, when traders fell to thousands of shares Jobs to meet new rules and regulations. The fear has always been that in a real crisis, such as Italy, which would leave the Eurozone, a built-in mechanism did not exist to take the other side of huge sell orders and exacerbate a crisis. But right now, supervisors should have their banks on big balance sheets. In this sense, it is questionable whether the global financial system has been made really secure.
"The supply" The imbalance between the goods is gigantic and the liquidity is incredibly bad, "said Scott Thiel, Deputy Chief Investment Officer for bonds at Bond giant BlackRock Inc., told Ainger in an interview, "It would be impossible to trade in any significant size." Perhaps the silver lining is that the moves overstate the scale of the Italian and Eurozone crises "The market has cut itself off from fundamental history," Thiel said. 19659010] Where is the bottom?
The first question traders and investors asked on Tuesday was how bad could it be in Italy? Judging by trade patterns, the answer was much worse.The euro crisis of 2010-2012 has the common currency, according to Societe Gen's market strategist erale, Kit Juckes, pressed up to 25 percent. By comparison, the euro has fallen in recent weeks only about 10 percent. This means that the risk of the euro falling to $ 1.10 by the end of the summer is "significantly higher" from $ 1.15 on Tuesday than the possibility of a rebound to $ 1.20, Juckes wrote in a research Grade. Although the weaker euro could help support exporters in the region, it could reduce much needed foreign capital. The same applies to Italian bonds. Although Tuesday's 10-year yields rose from 1.79 percent to 3.44 percent on Tuesday, they even reached 7.48 percent at the end of 2011. And 2.87 percentage points, the difference between the yields of Italian and German bonds compared to the high of 5.49 percentage points in 2011. "The risk of further rating downgrades depends on the Italian bond market," said Juckes in the note. Moody's Investors Service said on Friday that it was Italy's credit rating, which is only two levels above the value of junk, due to concerns about the new government's financial plans and the risk that some important past measures such as the pension reform reversed could be reduced. Where to go next?
The euro has fallen to its lowest level against the dollar since July
WHITHER THE FED?
Three weeks ago US Federal Reserve Chairman Jerome Powell signaled in a speech the burgeoning turmoil in the emerging markets would not change the fact that the central bank is planning at least two more interest rate hikes this year. But now that Italy shakes not only the Eurozone, but also the global markets, traders are betting that the headwind for the Fed may become too strong. While a quarter-point hike next month sees a margin of 1.75 percent to 2 percent off the futures market, the expected rate hikes in September and December are undeniable. As a result, yields on biennial Treasury yields plummeted, falling from 2.31 percent on Tuesday to 2.60 percent less than two weeks ago. Stock traders are visibly shaken by developments in Italy, with the S & P 500 index slipping 1.64 percent on Tuesday, just slightly off profits for the year. Banks around the world have been hit particularly hard, which is never a good sign. The Bloomberg World Banks Index even fell 2.51 percent, its highest level since June 2016. "The political situation in Italy is arduous, and then you get more general concerns about the strength of the euro market in general and that in turn has some people thought-provoking Perhaps the Fed will slow down here in the US to raise interest rates, "said Peter Jankovskis, co-chief investment officer of Oakbrook Investments, to Bloomberg News. "It has been a big pillar for finance as a whole, interest rates will continue to rise and their margins will continue to improve."
The commodities market has not been spared since the Bloomberg Commodity Index consolidated its largest two-day sideways move since early March and even lost 1.35 percent. Traders clearly believe that the turmoil in emerging and eurozone economies will affect global economic growth and demand for commodities. The declines were distributed across all commodities, from oil to copper to corn. As usual, oil received the most attention as crude oil extended for weeks in the midst of signals from Saudi Arabia and Russia that they will restore some of the production they have contained to reduce global oversupply. West Texas Intermediate for July delivery fell $ 1.15 to $ 66.73 a barrel on the New York Mercantile Exchange after previously touching $ 65.80, the lowest intraday level since April. Oil futures fell for the fifth year in a row, the longest since February, as Jessica Summers of Bloomberg News reports. The decline should help cut gasoline prices, which rose to nearly $ 3 a gallon in the US, the highest in four years. "The comments from Russia and Saudi Arabia have clearly shaken the bubble," said John Kulduff, partner at the New York hedge fund company Again Capital LLC, told Bloomberg News. The discussion over the rising production of the world's top two oil exporters put an end to this month's rally, fueled by fears that supplies from Iran and Venezuela would shrink.
Emerging markets rallied strongly on Tuesday. The MSCI EM index even lost 1.32 percent, moving lower into the red-year index of currencies falling as much as 0.72 percent. If the global economy slows and demand for commodities, which is a key export of developing countries, fades, financial assets will be penalized in those markets. The economic data of the emerging economies are already below the estimates since 2016, according to the economic surprise indices of Citigroup Inc. since 2016. The worst hit on Tuesday was South Africa. The rand lost 1.80 percent and its major index lost 1.62 percent. A surprise on Tuesday was Turkey. Optimized for the second consecutive day, the lira confirmed that the central bank's decision to clear its interest rate system signaled that it could fight the devaluation of the currency without pressure from President Recep Tayyip Erdogan. The Monetary Authority said that its benchmark from June onwards will be the one-week repurchase rate that it has not used as a primary funding instrument since January 2017, according to Tugce Ozsoy of Bloomberg News. "The sell-off has given rise to increased central bank independence," said Per Hammarlund, SEB AB's chief strategist for the emerging markets, to Bloomberg News. "A reversal of this stance and increasing political influence on monetary policy is unlikely in the coming months."
Track [Kanada] on Wednesday . Then the representatives of the Bank of Canada conclude a monetary policy meeting. Although there is a consensus that the central bank will keep its target rate at 1.25 percent, it will be interesting to see if government officials believe that the recent turmoil in emerging markets and Italy and the ongoing Nafta talks are affecting the global economy and whether they downplay the potential for a rate hike in July. Although the Canadian dollar was buoyed by the recovery in oil and energy prices, the currency has still fallen over the year as measured by correlation-weighted Bloomberg indices. Canadian households are highly indebted, with mortgages, credit card and other credit swelled to $ 2.1 trillion. These figures are, according to Chris Fournier of Bloomberg News, easily the highest in the group of seven and Erik Hertzberg.
Investors from the Italian branch: Mohamed A. El-Erian
The European Central Bank Fiddles as Rome Burns: Marcus Ashworth
Italy's nightmare has no end in sight: Ferdinando Giugliano  Traders are too safe in the Fed course Path: Bianco and Breitholtz
Gasoline speculators are a bit too strong: Liam Denning
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.