The Weekend Is Over, And Asia Is Getting Slammed

Markets are open in Asia, and it’s ugly.

Japan’s Nikkei is down 1.9%.

Korea’s Kospi is down 1.8%.

The yen is up 0.3% against the dollar.

Gold is up 0.7%, touching its highest level since November.

This comes in the wake of Friday’s ugly U.S. sell-off. We saw the Dow fall 318 points and the S&P 500 tumble 38 points to end the week, both moves reflecting losses of 2%. Year-to-date, the U.S. market is down by 3.1%.

U.S. futures started trading again at 6 p.m. ET, and so far they’re not doing much. S&P 500 futures are down 3 points or around 0.2%.

Much of last week’s volatility seemed to originate in the emerging markets where currencies tumbled around the world. The Turkish lira, Argentine peso, South African rand, and Russian ruble were among the currencies that got brutalized.

Selling began during Thursday’s Asian trading session when we learned China’s Flash manufacturing PMI unexpectedly signaled contraction.

“We expect more soft data prints ahead, as the impact of slowing credit growth seeps through to the real economy,” said Societe Generale’s Wei Yao reacting to the Chinese data.

More broadly speaking, there is concern that normalizing monetary policy in the U.S. means higher interest rates and a stronger dollar, which could make debt financing costs increasingly expensive for the emerging markets.

Ironically, we witnessed a flight to safety last week amid the volatility and U.S interest rates fell. On Friday, Treasuries rallied sending the yield on the 10-year note as low as 2.70%.

The action in the Treasury market sparked an alternative theory regarding the market volatility. You see, the consensus had broadly been that interest rates would go up this year, meaning bond prices would go down. This may have been one of the most agreed upon calls coming into the year.

“Its mostly hedge funds and fast money accounts that have played it from the short side from the beginning of 2014,” said Tom di Galoma, head of fixed income rates sales at ED&F Man Capital Markets. “Most were looking for higher rates in 2014 near 3.5-4% on 10-years. This rally is all about short positions being alleviated and covered.”

The argument seems pretty strong that we may just be witnessing a gigantic bond market short squeeze.

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