There is one very important secondary observation to make on the Argentina melt-down: one of main reasons we saw such a dramatic crash in bonds and the near 50% tumble in the stock market was the complete absence of serious market makers or broking. This isn’t due to investment banks and traders not seeing opportunity in over-sold Argentina, but more a result of how capital regulations and trading rules have made it utterly non-economic to trade smaller, illiquid, risk markets. The market was opportunistic. We saw bid/offers wide enough to turn a supertanker thru – and it proved very difficult to execute any client orders.
The Implications are serious – if we see a breakdown, then the collapse of liquidity across markets like High-Yield (now officially defined as anything yielding anything) and corporate bonds will be crushing. Wide bid/offers and chronic illiquidity will massively exaggerate losses and deepen any sell-off. It’s going to hit less liquid equity markets also – look how wide Burford whipsawed last week, and it’s the biggest AIM stock on the London market. Sell-off’s are a bargain hunting opportunity… but who is prepared to take Argie risk..? (If you are interested, let me know if you are a buyer.. we may be able to help..)Source: Bill Blain Morning Porridge
Old-timers remember being able to trade a yard of Yen without much of a market shiver, today these days are gone -- aside from the Algos and the high-speed trading platforms (they are still there) the reality is that liquidity is only present when the market is doing well -- no doubt that in a massive crisis (1987 and 2008) most liquidity evaporates, but what happened in Argentina makes no sense; sure there are wider implications that Argentina may return to its "bad old ways" but it remains that this was a massive overreaction to a small (yet not insignificant) change in the political/economical landscape of Argentina, but the 50% market meltdown and the 25% bond correction are certainly massive overreaction.
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