So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €5 billion in 1 year Bills into what may well be a bidless market.
If anyone needed the proper epitaph for the insane stupidity out of Europe, Reuters may have just provided it. In an exclusive article, Reuters stuns us with the following: "German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say. French President Nicolas Sarkozy gave some flavour of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future." It gets much worse: "The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on towards deeper economic integration, including on tax and fiscal policy." Not sure how to further clarify this: Europe is preparing for its own end, and the dissolution of the existing structure of the Eurozone, which likely means an end to the EU in its current format, a reshaping of the customs union, and the overhaul of the zEURq.PK in its current form. Ironically, this may end up being favorable for the Euro... and detrimental for Germany. So the question is: will Germany go for it? At this point, it probably has no choice, unless it wants a mutiny on its hands.
For once, Fitch took the words right out of our mouth, and in the process reminded us that the time of the stupendously named ASSGEN CDS (357 bps, +41 today) is here (for our previous coverage on Generali, read here, here and here). And just because we like to live dangerously, we believe the time has come to knock on the door of the grand daddy of all: Pimco parent, German uber-insurer Allianz, where the crisis will eventually hit like a ton of anvils if and when things really get out of control. ALZ CDS + 12 at 136. Going much wider. After all, recall that the deus ex machina of the EFSF as a CDO Cubed came from, that's right, Allianz. So now that it has failed, guess who has the most to lose... If we had more time we would attach the recent Credit Sights piece on ALZ here, but we don't: we hope readers can track it down on their own.
As a reminder in 20 minutes we will have the first ever Nationwide Emergency Alert System Test. Just in case, you know, the internet fails and various websites can not be accessed after the test...