Overnight, the mysterious evil bond vigilantes not only launched another attack on Italy (didn't they just renew the ban on naked short sell?), but also set their sights on Spain. I have a hunch that this might be bad news, though with today's market you never know.
Back in early August, when bond vigilantes' Assault of 2011 was just starting, I was cautiously optimistic that Eurocrats might, if only barely, be able to hold things together this time. Since then, I have been increasingly acquiring a sense of awe over the seemingly inexhaustible and inexplicable ingenuity of Eurocrats in their relentless pursuit of experiencing all 4,819 ways of Painful, Slow Suicide. They have managed to severely punish everybody, including MF Global and Goldman (NYSE:GS), who has the audacity of placing any trust, confidence, or hope on them. How dare you.
Could this be It, the climax after what seemed like never-ending dry hump? In any case, it's very likely that eurozone is finally finding itself at the fork in the road: they either get serious about saving the euro or call it quits. I shall refrain from making any suggestions, of which I'm sure more than enough have already been offered by people much better qualified. Suffice it to say here that it will be an interesting day.
Aside from the usual, expected, boring stuff -- equities crash, dollar surge, commodities crash, gold crash, possibly even US treasuries crash, more intriguing and revealing will be the following:
- What happens in CDS land -- will it price in the possibility of non-triggering haircuts in Italy/Spain/France? If banks ultimately agreed to be volunteered on the Greek haircuts, ostensibly the same calculation could hold in the case of Italy/Spain/France, except on a scale that's a few orders of magnitude bigger.
- Will there be bank runs in peripheral (which now includes France apparently) and transfer of deposits to the core (Germany)? It's already happened, silently, in Greece. Will it happen in Italy now especially that Unicredit has been exposed?
- How far and wide will deleveraing chain reaction go once started by banks? It's hard not to link the recent selling of Chinese bank stakes by US banks to the euro crisis, aside from concerns on Chinese banks and economy itself. What will they sell next?
- How stressed will money markets (bank funding) be in Europe and US?
Get ready for the adrenalin rush, boys.
Disclosure: I am long UUP.
Additional disclosure: short GLD