Thursday, March 08, 2007

It's behind you / economist

good story. and a good song....

Should twitchy markets scare us?
WHAT'S that coming over the hill? Is it a monster?” The Automatic, an indie-rock band, might almost have written its recent hit with the stockmarket in mind. Most people struggle to muster much sympathy for overpaid Wall Street traders when share prices are falling. What they worry about is a market decline that seems to anticipate—or even cause—an economic downturn. ....

.. There has been a sharp fall in HSBC's activity-surprise index, which reflects whether economic numbers have surpassed or fallen short of expectations. A weaker-than-expected services-sector survey was followed by a surge in American unit labour costs, a fall in pending home sales and a 5.6% drop in factory orders, all seemingly negative indicators.

A look back at the past week or so suggests investors are indeed worried about economic growth. The assets that have sold fastest have been growth-sensitive ones—shares, commodities and emerging markets—whereas Treasury bonds have risen. Within stockmarkets, defensive shares, such as food producers, have done better than cyclical ones, such as miners.

Market turmoil also matters because financial services play such an important part in many developed economies. In America the industry makes up more than 30% of profits. Wall Street's big securities firms were on top of the world only weeks ago, basking in record profits and handing out bonuses to make Croesus blush. Last year was the best ever for the five biggest firms, which made combined profits of more than $30 billion. ......

The credit markets, to which the banks are naturally exposed, have long looked like an accident waiting to happen. In late February the interest-rate margins above Treasury bonds on high-yield corporate and emerging-market debt were very low by historical standards. Some narrowing of these spreads was justified by the fundamentals. Emerging economies are a lot stronger than they were ten years ago, with many enjoying current-account and budget surpluses. Surging profits have kept the default rate on corporate debt down to very low levels.

But investors probably became too complacent. According to Martin Fridson, a credit strategist, spreads in late February no longer reflected the return needed to compensate investors for the historic default rate on bonds. That is especially odd given that the credit quality of bond issuers has steadily deteriorated in recent years, as fewer and fewer companies have achieved the prestigious AAA rating. (thats quity an understatement.../ne leichte untertreibung. thanks to )

Credit spreads have widened again during the sell-off. The cost of insuring against default in the European high-yield debt market rose by almost 50% in a week (see chart). Higher costs for borrowers could prove to be a drag on economic activity.

Another element of the financial system that has caused concern is the “carry trade”, where investors borrow low-yielding assets to invest in higher-yielding instruments. Japan's low interest rates have made the yen the chief target for the trade in recent years.

When the storm broke, investors reversed their bets. .... (run to the exit forrest......)

It is tempting to believe the yen's movements have been fuelling recent events. But that may be simplistic. Stephen Jen, a currency strategist at Morgan Stanley, believes the equity and credit markets were the main arenas for a rethink on risk. Once these markets stirred, hedge funds were compelled to exit their riskier trades wherever they could. The liquid currency markets were an obvious place to start.

In any case, hedge funds were not the only ones who had been nudging the yen lower. A big part had been played by Japanese savers searching for higher returns overseas. They might limit the yen's rise. David Woo at Barclays Capital reckons that, each time the yen strengthens towards 115 to the dollar, Japanese funds will find it hard to resist the temptation to buy “cheaper” overseas assets—and start bidding down the yen again. (chart was befor the latest small rebound in the yen / der chart zeigt noch nicht den letzten kleinen rebound)

Sinking subprime mortgages, risky credit markets, reversing carry trades—any one might be the harbinger of bad economic news. Many monsters turn out to be a figment of the imagination, but this one seems more solid than most.

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Anonymous Anonymous said...

$ (US) is where it was in 1991 on a trade-weighted basis , and on average the same level as the last 16 years

11:11 AM  
Blogger jmf said...


but the last few years the us$ is clearly in a downtrend.

i can see it here every time a friend travels to the us.

the euro has made travelling much cheaper. :-)

11:18 AM  

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