Markets certainly exihbited a certain amount of nervousness on Friday, due in past to continued sub-prime issues and some disappointing earnings results from Google, Catepillar and Microsoft.
I look at the Bond markets for gudance regarding sentiment and when the DOW and S&P are plunging while global yeilds are dropping-that tells me investors are seeking safer havens and when I see a decrease in carry trade positions on top of that-it just indicates further distress.
While I still don't believe that sub-prime issues will spill over to the general economy or cause a systemic market crash, there will be several trends developing.
The pace of M&A and IPO will slow so investment banking is not a growth industry at this point, partially because the spread of investment grade BBB rated paper over credit defualt swaps has risen so steeply as seen in the first chart.
The second chart illustrates the rapid gain in corporate borrowing from bonds over banks and commercial paper while the third shows how interest payments as a portion of cash flow decreased:
I would expect this last trend will turn upwards as money will not be getting cheaper to borrow. It'll still be available though, just a bit pricier.
There is a spate of corporate earnings announcements for this week and this is likley to be the main driver of equity and bond markets and therefore for carry trades as well until the release of Friday's first estimate of Q2 GDP. Depending on the GDP details, would could see markets turn negative even if headline GDP turns out as expected. I'll outline all this for you on Thrusday in the News section.
We do have some housing reports also, but no one is expecting positive reports. Should earnings turn out better then expected, the negative reports may possibly be over-riden. We'll see.
I also would be watching the shape of the yeild curve, which was inverted last summer and then resumed its normal upward shape around the beginning of the year. The inversion of the yeild curve was right at the beginning of the long weak dollar trend. I would expect rates on the short end to narrow towards the long end and I would not be surprised to see the curve invert once again in the coming days and weeks, a signal from bond markets they're desirous of Fed easing.
It all points to further dollar weakening going forward-with unwinding in carry trades (should that occur) likely to be the only driver of potential appreciation of the dollar vs the high yeilders.
I look at the Bond markets for gudance regarding sentiment and when the DOW and S&P are plunging while global yeilds are dropping-that tells me investors are seeking safer havens and when I see a decrease in carry trade positions on top of that-it just indicates further distress.
While I still don't believe that sub-prime issues will spill over to the general economy or cause a systemic market crash, there will be several trends developing.
The pace of M&A and IPO will slow so investment banking is not a growth industry at this point, partially because the spread of investment grade BBB rated paper over credit defualt swaps has risen so steeply as seen in the first chart.
The second chart illustrates the rapid gain in corporate borrowing from bonds over banks and commercial paper while the third shows how interest payments as a portion of cash flow decreased:
I would expect this last trend will turn upwards as money will not be getting cheaper to borrow. It'll still be available though, just a bit pricier.
There is a spate of corporate earnings announcements for this week and this is likley to be the main driver of equity and bond markets and therefore for carry trades as well until the release of Friday's first estimate of Q2 GDP. Depending on the GDP details, would could see markets turn negative even if headline GDP turns out as expected. I'll outline all this for you on Thrusday in the News section.
We do have some housing reports also, but no one is expecting positive reports. Should earnings turn out better then expected, the negative reports may possibly be over-riden. We'll see.
I also would be watching the shape of the yeild curve, which was inverted last summer and then resumed its normal upward shape around the beginning of the year. The inversion of the yeild curve was right at the beginning of the long weak dollar trend. I would expect rates on the short end to narrow towards the long end and I would not be surprised to see the curve invert once again in the coming days and weeks, a signal from bond markets they're desirous of Fed easing.
It all points to further dollar weakening going forward-with unwinding in carry trades (should that occur) likely to be the only driver of potential appreciation of the dollar vs the high yeilders.
Attached Images
