Political drama in Europe bled into global markets to kick off the week, with a volatile session for bonds and equities in the U.S.
Larry McDonald, macro strategist and editor of the Bear Traps Report, told CNBC's "Trading Nation" on Tuesday that a respite could lie in the sessions ahead. Here are his reasons why.
• Political parties reached a dramatic impasse in Italy as a platform was put forth that threatens order in the European Union and depressed the euro. Meanwhile, the yield on the Italian 2-year note shot up above the yield on the for the first time since late 2014 as investors fled Italian bonds.
• European financial stocks fell sharply Tuesday, triggering a massive so-called short squeeze in U.S. Treasurys. Yields fell across the board in the U.S. as investors piled into the safe haven and perhaps covered existing short positions.
• In the next week or so, European Central Bank President Mario Draghi is likely to come out and attempt to calm the markets; a substantial relief rally will likely emerge as a result.
• Still, the risk of credit spread contagion in the U.S. exists, and equity investors should remain aware of the continued impact on U.S. markets. The Dow Jones industrial average and S&P 500 on Tuesday both saw their largest single-day declines since April 24.
Bottom line: After a massive move in global markets to start the week, a relief rally will likely lie ahead, according to McDonald.
