But… but… the VIX said everything is ok, and European rates were the lowest they have been in centuries… How can something possibly go wrong?
It just did.
The scandal which we first reported yesterday, after observing the record collapse in the bonds of troubled Portuguese lender Espirito Santo International following the failure to make a bond payment, has quickly escalated and overnight went nuclear.
It seems someone is intervening in Portuguese bonds…
Early on in the European trading session, following a report in Diario that E.S. International is considering an insolvency request, Espirito Santo Financial Group, which holds 25% of Banco Espirito Santo, fell as much as 16.15% to EU1.09 and traded over 15% lower at EU1.10, at the same time as Banco Espirito Santo fell as much as 7.15% to EU0.571.This was aggravated by creditors concerns that anything was contained after yesterday’s failed damage control attempt by the parent.
Then things went from bad to worse after Espirito Santo Financial announced it has suspended trading in its shares and bonds due to its exposure to ESI, adding the decision was taken due to “ongoing material difficulties†at its largest shareholder Espirito Santo International, according to regulatory filing.  ESFG says it “is currently assessing the financial impact of its exposure to ESIâ€. ESFG also suspends bond issued by fully owned subsidiary Espirito Santo Financiere. We will have the full, convoluted, org chart of Espirito Santo shortly.
At that point the genie was out of the bottle and thanks to Europe’s still completely insolvent banking system, linked intimately to the sovereign as the ECB has done absolutely nothing to break the bank-sovereign link, promptly hit the sovereign sector, leading to a blow out in the Portuguese 5Y yield +16bps to 2.616%, sending the 10Y yield pushing wider +12bps to 3.896%, and the 10Y spread vs bunds +15bps to 270bps, highest since May 21. And not only in Portugal but other peripheral spreads widened also, with Greece (which is supposed to sell 3Y bonds today – good luck) and Ireland expanding most in 10Y.
Then the safe haven trade came back with a vengeance and the September German Bund future rose as much as 46 ticks to a contract high 147.79, and sending 10 Year yields to all-time lows of 1.17%.
Then, the contagion spread to stocks as first European shares tumbled, with the banks and travel & leisure sectors underperforming and personal & household, telco outperforming. The Italian and Spanish markets are the worst-performing larger bourses, the U.K. the best. Then, it moved across the atlantic as S&P futures have tumbled the most in months in the premarket.
Adding insult to Portuguese bank injury, was very disappointing French (-1.7%, Exp. 0.2%, Last 0.3%), Italian (-1.2%, Exp. 0.2%, Last 0.5%) and Dutch (-1.9%, Exp. 0.3%, Last 2.3%) industrial Production data, confirming any illusions about a European recovery absent a fix of the broken credit channel are utterly ridiculous, and that the ECB was once again wrong focusing on boosting the carry trade – the very same reason why Portugal is today picking up the pieces as Draghi forced traders in the very same trades which today are halted in Portugal!
In other news commodities decline, with nickel, WTI crude underperforming and silver outperforming. But not gold and silver: the precious metals have exploded this morning, with gold trading north of $1340 (but… but… Morgan Stanley said…) and silver at $21.50.
Finally, US equity futures are tumbling. This may be the day contagion and volatility finally comes back with a vengeance, which is great news for all those who plodded through months of centrally-planned boredom and artificial stability. Let the games finally begin.
Market Wrap
- S&P 500 futures down 0.5% to 1958.2
- Stoxx 600 down 0.8% to 337.4
- US 10Yr yield down 2bps to 2.53%
- German 10Yr yield down 3bps to 1.2%
- MSCI Asia Pacific down 0.1% to 146.5
- Gold spot up 0.1% to $1329.8/oz
EUROPEÂ MARKET
- All 19 Stoxx 600 sectors fall; personal & household, telco outperform, banks, travel & leisure underperform
- 13.5% of Stoxx 600 members gain, 84.8% decline
- Eurostoxx 50 -0.7%, FTSE 100 -0.4%, CAC 40 -0.9%, DAX -0.8%, IBEX -1.6%, FTSEMIB -1.7%, SMI -0.4%
ASIA MARKET
- Asian stocks little changed with the Sensex outperforming and the Nikkei underperforming.
- MSCI Asia Pacific down 0.1% to 146.5
- Nikkei 225 down 0.6%, Hang Seng up 0.3%, Kospi up 0.1%, Shanghai Composite down 0%, ASX up 0.2%, Sensex up 1.5%
- 5 out of 10 sectors rise with energy, utilities outperforming and telcos, health care underperforming
