This week for the first time since the depression of 1929 the yields on US Treasuries turned negative i.e., investment in such Treasuries would pay back a lower amount on maturity. The three month Treasury bills gave a return of negative 0.005 pct. As the Treasury yields plumbed new lows the credit spreads of high-investment corporate papers worsened further. Spreads have actually doubled during the last 9 to 12 months reflecting the fear factor. CDS on Sovereigns have increased 8-10 times even for G7 countries during the same period!. Net of such spreads yields have dropped to ridiculously low levels reflecting the starkness of fear which is pervading in the world today. Certain indicators such as TED spread which is now at about 2 pct and yields on 30-day Commercial paper (at below 1 pct)etc seem to suggest that the liquidity overhang was helping to bring in some relief and credits were able to access better rates. However, the negative yields on Treasuries threatens to upset the improvement in the markets.
Madness or Fear -
November saw the dividend yield on S&P Index overtake the yield on Treasuries for the first time since three decades showing up the extreme pessimism that has set into the credit markets. This week brought in negative nominal yields after almost
8 decades reflecting the extreme fear prevailing in the market.
The week also saw the evaporation of any residual hopes that Automakers in the US had of a Federal Bailout as the Senate decided that Bankruptcy was afterall not a bad option for the Big Three. The Executive Wing had to immediately step in to promise its support from the TARP in another example of the twists and turns that the programme has been subjected to. It has evolved into a programme that was targeted at purchasing trouobled assets but has actually provided capital/funding to the banking sector and is now addressing the funding constraints of the auto sector. The prospect of use of TARP funds for the Autosector has helped recovery of global markets on Friday.
This episode is the latest one in the series; there will be more to come. This episode which has taken weeks to reach the current stage, shows that governments are increasingly being forced by markets to intervene and support industries. Unfortunately, all these measures seem aimed at supporting the supply side. Markets have anyway decided that this measure is a short-term fix and has a good chance of ending in zero improvement unless the US economy stablises or the Government follows up with more wholesome measures (covering the entire economy). However, the problem is on the other side where consumers fear losing livelihood and bankruptcy (and foreclosures due to inability to service their mortgages). It will take time for the demand side to revive. Until then, pushing the supply side can only worsen the supply/demand equation and lead to pricing weakness to exacerbate.
Currencies
Finally, the week saw the EUR and GBP reverse from their lows. After straining for weeks, on Friday, the Japanese Yen managed to break through the 90 barrier against the Dollar after news of failure of Auto bailout by the Senate hit the market and reached a 13-year high of 89. The move from 91.50 was worth more than 2.50 pct but the move exhausted within the day itself. A move of 3 pct is counted as a large move in the markets. However, the reversal came not from any BOJ intervention (as many had been hoping for sometime), but by the assurances of the US Administration that it would use TARP funds to organise the bailout. The move in the Jap Yen, the mother of all carry currencies on the back of the failure of the Auto bailout as well as the reversal on news of infusion of TARP funds suggests that nerves are really frayed at this stage. But, the key input for markets was the apparently nonchalant reaction of the Japanese to the fall in USD/JPY. Does this mean that we do not have a line in sand any longer? For all those holding long USD/JPY positions on derivatives, or running Yen denominated loans nothing could be more worrisome than this. We need to watch for markets' reaction on Monday. However, if the reactions of equity markets on Friday (in London and US) are any indications, it seems that the break down of the USD/JPY may take some more time.
Meanwhile, the nice rally in EUR/USD helped pull up commodities. EURO is close to resistance zone, so this week's action is important as we run into Christmas holidays from next week. The action on emerging markets' currencies has been a little mixed with the Korean and Russian currencies showing some weakness while many other currencies have strengthened along with stock markets.
The recent moves, with small rallies adding to each other, suggest that we are in the midst of a bear market rally. Equity markets are likely to lose when the quarterly results begin to come out. With all countries (that count) effectively in recession, or suffering from big drops in GDP growth rates there is no way that a rally in equity markets can be sustained so soon. More pain is on the way.
Showing posts with label Equity. Show all posts
Showing posts with label Equity. Show all posts
Sunday, December 14, 2008
Saturday, October 11, 2008
The increasing sense of urgency - can markets survive?
During the week ending 12 October major Central Banks gave coordinated rate cuts of half percentage each. In the process, the ECB, FED had to give up their previous stances on the interest rate cuts.
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.
The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.
Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.
The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.
Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.
The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.
With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.
The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.
Therefore, I would say - Hang on! We are almost there!
Subscribe to:
Posts (Atom)
