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Eurozone panic update

Every day that goes by without a collapse of the Eurozone banking system and/or economy is a day the markets breathe a little easier, even if a lasting solution (i.e., genuine austerity measures and meaningful debt restructuring for Greece at the very least) remains elusive. The world can only be panicked about an upcoming default and financial catastrophe for so long; as time passes, people, banks, and institutions take steps to insulate themselves from the expected disaster, and that inevitably makes the impact—when it happens—less severe.

Call it "panic exhaustion." The Vix index has been trading at elevated levels for almost three months now, and that's a long time. Hedgers get tired of paying huge premiums for options that don't pay off, while sellers of options feel better and better as time passes and they collect their option premiums. Taking risk becomes more attractive that avoiding it. Fear continues to run high, and that is depressing the prices of most risk assets, but the passage of time without the fears being realized is the enemy. 

Eurozone swap spreads have been trading between 90-100 bps for almost two months, while U.S. swap spreads remain at levels that are more or less "normal." There has been no contagion to date, and the U.S. economy continues to slowly improve. 

Copper futures sold off in September as everyone rushed for the exits, but prices are coming back as economic life goes on and underlying demand remains relatively strong.

Same goes for crude oil futures, which have rebounded by a hefty 20% since the peak of the panic (October 3-4).

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