The markets took everyone for quite a ride today. The S&P was down 9.3% at 2:44pm before coming back to end the day down only 3.25%. The Vix, a measure of expected 1 month S&P 500 volatility, spiked from 23.8 to over 40, before settling in at 32.8 at the close. Currency markets also panicked, the EURJPY traded down 4.9% from open to close, at one point trading down almost 8% to levels not seen since 2001. In commodities, crude oil sold off while gold rallied, a sign that there is financial stress that is likely to negatively impact the economy.
So what is causing this craziness?
1. Technical mishaps. There are rumors that a trader with fat finger at Citi sold billions instead of millions of Proctor & Gamble stock. CNN Money's twitter also suggests that something fishy was going on with P&G's stock quotes. The funny business in P&G wasn't the only technical mishap story. At least one stock traded for only a few cents on the dollar before jumping back up to over $40 dollars. Vanuguard's Small-Cap ETF also took a pounding before closing at relatively normal levels at the end of day. Part of the stock market's extreme mid-day fall could be explained if the stock's sell off caused programmatic trading strategies to hit their stops and automatically get out of positions.
2. Greece imploding: The Greece protests are making market participants wary of sovereign risk in the rest of Europe. The striking Greek citizens appear somewhat crazy - Greece's primary deficit is over 8%, so even if they wanted to stick it to the financial markets and default on their debt the government would have to implement austerity plans. With this is mind, their protests are a mass protest of reality. Even worse, their striking makes any hope of a Greece recovery even slimmer than it already is. The country can't earn money to pay off the debt when their country isn't working and the tax collectors refuse to collect taxes. The best case for Greece is that the protests are some type of cathartic reaction, and the citizens will get back to work after expressing their anger. Today's market movement suggests that the market didn't buy this story. Furthermore, the money for the Greece bailout has not been 100% secured yet, so rumors about Germany not approving the money may have also scared the markets.3. Contagion: The Greece bailout protests also give investors a view into the type of pressure other European countries are facing if they try to implement austerity measures. The other countries will have to implement the plan with a situation far worse than Greece's. For one thing, Merkel's party is probably going to be punished over the Greece bailout in Sunday's Nother Rhine-Westphalia election, reducing the probability of other countries getting a similar bailout. Furthermore, the current administration in Greece is still viewed more favorably than the opposition party, which lied about the deficit and the level of debt. Greece is also implementing the austerity measures in return for assistance, while other countries such as Spain (Which is too big to be bailed out as it is) will have to implement them merely to avoid disaster and without the cover of a hated opposition party. The worry about Spain's ability to repay their debt has been rising, the spread between German and Spanish bonds started the month at 101.3 basis points and has widened to 162.8 basis points. Worries are so intense that Portugal's 5 year CDS spread is now trading around 453, where Greece's CDS was in mid April.
Without the Greek problems and the contagion worries, the technical issues might not have been that big an issue. However, in the context of these structural problems, the technical glitches caused quite an interesting day in the markets.