That didn't last long

Uh-oh. For a few hours there, things were looking hunky-dory. The stunning late-session rally in the SPX, which carried over into overnight futures trading, has reversed with a resounding "thud."

It all looked so promising. Cash rates actually fixed lower (see the ICAP 3 month fixing rates below) amid rumours of either Fed rate cuts or that they will enter the unsecured lending market, which has helped swap spreads come a bit lower. Add in a much bigger than expected 100bps easing from the RBA, and everything was looking hunky-dory.
Whoops. That didn't last long. Iceland is imploding; its banks are dropping like flies, and EUR/ISK has traded as high as 350 today. Anyone wanna buy West Ham?

On second thought, maybe you'd better hold off. After all, do you really want to invest in a market where three of the largest banks allegedly handed the government a £45 billion preemptive bill for a bailout? While the story has unsurprisingly been denied, public statements from financial institutions are worth about as much as Confederate dollars (or, for that matter, Icelandic kronur) these days.

Ultimately, all of this may finally set the stage for a tradeable bounce in equities. Yesterday's late session squeeze in the SPX was reminiscent of that on August 16, 2007, which was followed by a "surprise" intra-meeting discount rate cut before the next day's open. Bear market bottoms (even those of the "tactical bounce" variety) require capitulation, and yesterday's equity price action until about 8 pm London time was certainly capitulative.

Macro Man is hearing stories of real money funds seeing redemptions from panicky investors, which is usually another sign of panic lows. Looking at the S&P mini future, we can see similarities to other (temporary) market bottoms since the crisis began last summer. High-volume days which put in a candle with a large lower wick have marked the panic lows of last August and January of this year.

Each of those was, of course, accompanied by a Fed policy easing. This time around, los Federales will probably need help from their European amigos. But if we do get a coordinated rate cut, Macro Man would contemplate going (small) net long to play for a tactical bounce, which would more or less be the first time that that has happened all year.

Of course, if 1.15 pm London time comes and goes with no announcement, then it's probably back to Plan A- namely, equities heading south at great speed. At this point, markets are adopting petulant child mode- throwing their toys out of the pram until they get what they want. And while all parents know that it's a bad idea to give into your children every time they get upset, occasionally you have to try and calm them down.

Yesterday was the first day since this whole fiasco began that Macro Man was scared by what he saw- and he had a decent day yesterday. And there's nothing wrong with calming a frightened child. It might not last long, but there's something to be said for avoiding a complete meltdown.