If Italy goes to the brink...

Federal Reserve has finally gone full throttle as a lender of the last resort via its shock and awe rate cuts as well as its primary dealer/commercial paper backstop facilities. This has unclogged the US money markets but not prevented a full scale global US dollar funding squeeze.

The plunge in emerging market currencies vividly demonstrates that cross-border lending to EM will collapse, as in 2008 or the 1998 Asian FX meltdown. At this stage of the crisis, the world's only real safe haven currency is King Dollar.

The spike in Italian bond yields to 3% reopens existential risk for the Euro. Italy has the world's third largest bond market but a fragile banking system and 135% debt to GDP ratios. If Italy goes to the brink, the EU could well be forced to seek the biggest bailout the world has ever seen from Brussels and the IMF.

Note India's IndusInd Bank and RBL Bank are down 30% on systemic fears. This is getting scarier as a depositor run on all Indian private banks is not implausible.

I had recommended short on the Aussie for a target of 0.6450. Even though this trade made money, I am stunned to see the Aussie plummet below 0.6000 or way below its 2009 lows.

Be safe!

Matein Khalid is the Chief Investment Officer of Asas Capital Management. He has 25 years of experience in international capital markets as an advisor to family offices and fund managers. He has worked for investment banks/hedge funds in New York, Chicago, London, and Geneva. In addition, he has been the CIO of a technology fund in San Francisco, a royal investment office in Dubai and a public insurance company listed on the DFM.