I have changed the color scheme of the blog - it is less dramatic but hopefully it improves "readability".
Yesterday's drop in equity markets is being blamed on the bond market, which supposedly sank because the economy is "improving". I don't know about the "economy improving" part, but historically the most potent poison for financial markets was higher interest rates - and more so in this Debt Bubble Era.
Ten year Treasury rates are at 5.10%, very near a 5-year high. I think we can safely say that mortgage refinancing for all real estate purchased and financed during the Real Estate Bubble period of 2002-2005 is now near impossible: The yield curve is flat as a pankace and painful all over. This removes the last refuge of the highly-indebted consumer, who now faces rising interest rates to go with already high fuel and food prices.
April and May retail sales were weak to begin with; given the above I think June - traditionally retailers' second most important month after December - is going to be soft, too.
But if the economy is soft why are long interest rates rising? I don't for a second buy the "stronger global economy" argument - I think what is happening is more technical and with broader consequences for markets. The Debt Bubble of the past 5 years has created trillions in new non-government debt, particularly in longer maturities. US mortgage debt owed by households alone increased by $4.4 trillion during 2002-06, all under extremely low interest rates. Most of it became securitized as CMO/CDO's and further derivativized through CDS's. This process has created a huge new mass of bonds, all vulnerable to losses as long interest rates rise; hedging them against interest rate risk is most commonly accomplished through selling short the 10-year Treasury (cash and/or futures).
What may be going on is a rush to hedge this huge pool of relatively newly-issued mortgage-backed bonds, thus creating its own vicious cycle of persistent selling. Nothing to do with the economy...