Functions come and go in the market. For years, the Japanese yen was considered the preeminent funding currency for the carry trade and was later treated as the market’s favored safe haven when the current financial crisis took hold 18 months ago. Recently, however, the dollar has usurped this title on the notion that the unrivaled liquidity of the US markets and the extensive efforts made by the government put the economy and currency further ahead of the curve. This is a highly speculative position though which could shift should either risk sentiment or the dollar’s correlation to such considerations change.
The Economy And The Credit Market
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Functions come and go in the market. For years, the Japanese yen was considered the preeminent funding currency for the carry trade and was later treated as the market’s favored safe haven when the current financial crisis took hold 18 months ago. Recently, however, the dollar has usurped this title on the notion that the unrivaled liquidity of the US markets and the extensive efforts made by the government put the economy and currency further ahead of the curve. This is a highly speculative position though which could shift should either risk sentiment or the dollar’s correlation to such considerations change. Over the past weeks, the dollar’s role has been consistently undermined. Recently, Australia’s central bank held its rates unchanged, prompting speculation that the economy would be the first of the G10 to recover; while Chinese officials recently announced the Premier was set to announce an expansion on their stimulus efforts. For its own part, today’s Fed Beige Book suggests an economic recovery isn’t even in the cards until late 2009 or into next year. Add to that the massive cut in payrolls expected from NFPs this Friday; and the dollar looks to be coming under review. |
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A Closer Look At Financial And Consumer Conditions
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Market conditions are still well off the panic levels of October; but recent developments have once again cast doubt over the health of the global economy and its credit flow. So far, the bailout and stimulus efforts made by the US government and its global counterparts have not encouraged a notable turn in consumption; and the forecast for returns has suffered in turn. More pressing though is the constant threat of another shock to the credit market. AIG was extended yet another loan, revealing the condition the financial sector is still in. Now, investors are focusing on a potential crises in Eastern Europe and a revaluation on subprime debt as the next major threats. |
The Fed’s assessment of the US economy in its regular Beige Book report reflected an economy that has hit its recessionary stride. Ten of the twelve district banks that comprise the nationwide view on activity noted weakening regional economies. What’s more, consumer spending was said to be ‘very weak,’ the housing market was said to be ‘in the doldrums,’ and factor activity saw ‘steep declines’ in some areas. Altogether, the Fed predicted a ‘significant’ recovery would not develop until the end of this year or early 2009. Much of this is already priced in though. For a fresh take on growth, market participants await an expected 650,000 drop in NFPs. |
The Financial And Capital Markets
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Investor sentiment has wavered over the past week. The US benchmark equity indexes dropped to fresh 12-year lows shortly after liquidity filled out on news that the world’s largest insurance company, AIG, required another massive loan and that the government was splitting the firm. This is another near-failure that is straining the government coffers. Taking a critical look at the lack of optimism behind the market, it is clear that the traders are well aware that this is not likely to be the last major firm to find itself in trouble. Nor are there any illusions that all companies can be saved. Despite this growing wave of pessimism, however, we have seen that momentum has not taken advantage of the equity market’s push to new lows. Signs that other global powerhouses are stepping up their efforts to stabilize financial conditions and their own economies may finally catalyze a genuine turn in sentiment among consumers and investors. |
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A Closer Look At Market Conditions
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The benchmark Dow Jones Industrial Average fell below 7,000 for the first time in twelve years this past week. This is true testament of the broad bear market that has evolved since the summer of 2007 and is further a good reflection of the feeble fundamentals that currently support the US economy. Looking at the severe lack of consumer spending and available credit in the market, returns are no doubt destined to contract through the end of the year. However, growth can potentially recover well before the tools of finance do. As such, it will be important to monitor prices for physical goods against financial assets as the turn in economic activity will likely precede risk appetite. |
Some of the market’s best measures for risk have taken a considerable turn for the worst over the past week. While volatility indicators for the equities, currency and commodities markets have experienced relatively restrained rebounds; the prominent credit and lending gauges mirror a concern that could easily spread to the more speculative asset classes. From a modest rebound late last month, we have seen risk premiums in credit default swaps and junk bond spreads take on momentum not seen since the market slump back in October. If there is a major downgrade on debt ratings (as S&P and Moody’s have warned) or prominent bankruptcy, it could ignite panic once again. |
Questions? Comments? You can send them to John at [email protected].
