Market Capitulation: Is Something Breaking?

We are currently witnessing a serious capitulation event in small and mid-cap stocks on the ASX.

There are plenty of reasons for the sell-off. The heat is coming out of the AI trade, and any stock with even a hint of AI is being unceremoniously dumped.

In the US last night, the Nasdaq had a terrible night, dumping about 3%. And it looks like plenty of the money coming out went into bonds because they had a massive rally.

The US 10-year bond yield was down 16bps to 4.96%. That is a massive fall in yield in one trading session.

Oil prices are also looking dangerous, with Brent Crude Oil nudging above US$114. If it shoots above $120, all hell could break loose.

Bonds are seen as a safe haven, but gold isn’t. It fell over US$100 in the session and is a hop, skip, and a jump from the abyss at US$4,000.

Gold could freefall for a bit under there.

French 10-year bonds continue to implode, with their spread to German bonds hitting an eye-watering 176bps.

Apparently, plenty of fund managers are being shown the door in Europe. They were buying French government bonds, financing them in the repo market using those same OATs as collateral, and pocketing the gap between the bond’s yield and the repo cost.

Of the €250 billion of repos in Europe, €100 billion is in French bonds.

That’s a whole lot of pain still to come, methinks.

Big investors are balking at buying French bonds ahead of the election in April next year.

This could be a case of very bad timing, with much of the recent buying in French bonds shifting to hedge funds, which are now dumping en masse as their easy money-making scheme blows up in their faces.

Add in the selling by Japanese banks and life insurers repatriating cash as their Japanese bond yields race higher, and you can start to see the repercussions of the sharp jump in yields worldwide recently.

There is plenty to talk about in today’s Closing Bell, that’s for sure!

So click on the link below and grab yourself a beer or two to settle the nerves.

Closing Bell