The Nasdaq Future tagged the downside objective of the huge 8/24 pattern and rebooted today. The SP flitted in to the 1862 "sell" level on the lows the this morning. The selling back and fill has collapsed the curve and Eurodollar year spreads sunk to new LOWS. The Red/Green pack spread is a paltry 48.25 basis points. Edh16/Edh17, a spread we have liked when down here, is back at 57.
The inclination is to pin the pancaking on the equity slide. The situation may be becoming self- reinforcing, however. As we have opined since 2009, the financial system plumbing has been retooled. The regulatory and operational funding of the wholesale funded system has been bypassed. That Eurodollar relationships can be this flat, after a year of Fed jawboning!, is the starkest evidence of failure. Long term swap spreads have swung negative, as they did during the crisis. More importantly, since the Aug 24 pattern date, shorter maturity swaps have collapsed also. Thee are practical reasons flowing from the repo side that encourage the situation but it is difficult to not view the landscape as impaired.
The palindrome of "curve compression, stocks to sell off, causing curve to flatten....needs to be broken at the most basic level of the money market. The widely accepted position after several QEs and years of ZIRP is there has to be plenty of "dollars out there." From oil to commodities to the color coded Eurodollars, the evidence remains there are too few. Equity markets, globally, are forced into the recognition that they must recede to a level more connected to the actual, smaller and constrained system. Even sludgy, briny Martian water must flow home.
Our motto remains- Steep is GOOD.