How bad will it get? That’s the question slamming markets this morning as Credit Suisse is again in the headlines for all the wrong reasons: The Saudi National Bank has cut them off from further financial assistance. The CDS have soared and the stock is getting ever closer to zero.

Futures were essentially flat after a very nice rebound yesterday – until the news hit.  Now, they’ve given up essentially all of yesterday’s gains and some important technical support.

continued for members…

ES made it back to its SMA200 yesterday, but SPX never did. Today was going to be the day for the next leg up. Now, that entire scenario is again very suspect.

As yesterday, the key for bulls remains getting VIX back below its SMA200 and ES/SPX back above theirs.

It would also help tremendously if USDJPY and EURUSD weren’t tanking. But, currency markets are following the bond markets’ cues. And, right now, the yields on the 2Y are screaming lower – the fear trade in full bloom.

The odds of an ECB rate hike have arguably been greatly reduced, meaning the euro will continue to be under great pressure.

The BoJ is no doubt weighing the costs of a strengthening yen and hoping that investors continue to ignore the much worse conditions amongst Japanese financial institutions. Oil and gas prices are generally positively correlated with stock prices. So, falling CL and RB usually hurts stocks. Since markets are hoping for a pause or slowdown in rate hikes, however, lower CL.RB prices are actually helping stocks this morning.

The hitch, of course, is that the plunge in the 2Y……is outweighing the drop in the 10Y……which is producing a large bounce in the 2s10s.  If there’s one chart that speaks to the current risks in the market, it’s this one. Long time members will recall that sharp dips in the 2s10s accompany equity corrections, but sharp rebounds above resistance accompany equity crashes.

If the 2s10s pushes up past the little red TL below, we will get another sharp decline in equities.

We can see that the long-term downtrend (dashed purple line) has already been broken – meaning that the latest equity bounce is very likely a counter trend bounce on the way to lower prices. If the 2s10s rises above -48 bps, things should get very ugly, very fast.