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Posts Tagged ‘CDS’s’

Brace for a global recession

Posted by Adrian on October 7, 2008

Don’t listen to politicians and some bank economist, who have been in denial that the world is heading towards a nasty slump, which could yet end up being a depression. The markets revealed bear markets in stocks early 2008 and commodities started to slow throughout 2008 to present (apart from gold). Shipping has also been slowing rapidly, refer to dry baltic index (morbius glass: The world is most likely in recession). So one should follow the markets closely rather than commentators that have essentially done very little analytical research into the huge unwinding of the credit markets and deleveraging.

Despite the ‘bank bail out’ bill becoming law in the US, the wider economic problems are reverberating around the world. More particularly Europe, which has overinflated housing markets in the UK, Spain and Ireland. So the credit crisis or liquidity squeeze that is causing turmoil amongst European banks, is also on the fear of local housing busts in the main European economies. One could argue that the US was technically in a recession since late 2007, now showing signs of a prolonged and harsh recession. Europe could be hit harder than the US, the markets are now factoring this in, look at the European dollar, a once high yield currency – which was theorised that the European dollar could replace the US dollar as a base currency. This of course won’t happen now, the European economies are all going to fall into recession in unison. The EUR has been sold off quite dramatically of late, weak currencies like the USD and the Japanese Yen are now being bought; since they were both so oversold for so long. The high yield EUR is losing favor. This is a clear signal that Europe is now in recession and the European central Bank (with other central banks) will cut rates aggressively.

The selling off of the EUR is in response to major bank troubles in European and European governments insuring bank deposits for the consumer. Essentially revealing to the US markets that the world is heading for a bad slump; lead by the banks. So in conclusion whatever the bailout bill does to the US, which is very little, the US market accepts that not only is the American economy suffering from so many economic woes, Europe is also.

Reiterating negative market sentiment was the Dow falling 770 points from 10,314 (6 Oct 2008 ) , then recovering to 9,955 points, this is in response to the European Union trying to instill calm, and also the fact that the EU is under strain as countries are independently acting on the banking crisis within Europe.

The next problem will be corporate failures and bankruptcy’s, with credit related derivatives and credit securities backed against company debt. When corporates failures kick in, we could see a huge collapse of hedge funds that invest in corporate bonds (and other complex debt investments). Either way the credit markets are near death. Businesses will find it almost impossible to raise capital. With business capital running completely off credit lines, even if Hedge funds go into survival mode and short sell companies into oblivion; the credit default swap (CDS’s) market will come into play. So the corporate bankruptcies will be an inevitable aspect to the global recession. We may see this occur very soon, as Hedge funds with massive leverage themselves, may fight to survive like a desperate animal. Like I mentioned, since the credit markets are now depressed. Liquidation of assets from companies and CDS payouts may be the only lifeline to Hedge Funds that have bought corporate debt.

In regards to the point I made about civil unrest in Europe, if the Italian PM Silvio Berlusconi is correct that the rest of the EU may bail out the whole European banking system (which is somewhat unlikley, since the US plan will be a flop) – if housing busts inevitably occur on a large scale across the EU and the European Central Bank decides to purchase junk mortgage related assets (from retail banks) – with EU taxes. History has shown that the Germans, French and English know how to riot.

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Global recession, credit crisis and inflation

Posted by Adrian on August 28, 2008

As most of the global economies have had their GDP crunched, the overall indicator (or consensuses) is a global slowdown or recession. The US has slowed considerably, contributing to estimates that the world GDP will fall to -0.8 %.

The US economy is by far the catalyst to the global economic crisis, the Federal Reserve slashed their interest rates down to 2.00%, at a time when inflation globally was a problem (and still is); other central banks sent confusing messages with interest rates, some increased rates like the European Central Bank (although tentatively) and the Australian Reserve Bank, Brazilian Central Bank among others; in which now there could be a slashing of interest rates by most of the developed economies central banks, with the US possibly starting to raise rates. It is overall a disproportional global economy that is now unhinging quite dramatically. The UK, Ireland and the EU are all now most likely in a recession, Asia Japan, Singapore, Malaysia and Korea are also in recession, with Asia/pacific countries such as Australia and New Zealand technically falling into sharp recessionary conditions.

Effecting the slowing economies is the retraction of the credit markets, or as it was better known just over a year ago; the credit crunch. But the credit crunch quickly became known has the ‘credit crisis’, as the credit markets literally froze up. The CDO (collateralized debt obligations) markets became untouchable and the damage to the banking system has been dramatic with an overall erosion of confidence in that sector. The credit crisis hasn’t even gone half way through and there is still no end in sight. As discussed in Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue, the bank failures in the US should be about to occur, most probably all at the same time. Just recently the FDIC has warned that 117 banks could go into bankruptcy, this is of course and underestimate as we may see the hundred plus number appear. The LIBOR rates are showing a tighter and progressively more cautious market with interbank lending, which would indicate the mistrust that the banks have with each other other disclosed toxic assets sitting in undeclared accounts. It will be interesting to see how far the credit crisis reaches the consumer, that has become so leveraged with credit cards to cover high inflation (costs) on food, oil and everything else. The big question is, could the banks at some point cut credit lines to consumers. This is a distinct possibility, if the credit markets do not normalize anytime soon.

But the US economy is in a dysfunctional and confusing state, with a cash rate so low, high inflation, the stock market has had sporadic rallies, then dramatic sell offs, the commodity markets namely oil are (in my opinion) showing instability and volatility with pricing – that appears to be pointing to a large spike at some point in the future (please refer to:Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?). The US export markets are solely contributing to the US GDP, but for how long? If the USD strengthens and the rest of the world falls into recession – this will most certainly effect American export sales.

The recent US dollar rally is a good indicator of Europe and the UK’s slow downs, with also parts of Asia slowing too. The USD was one of the most oversold currencies, but I still see some further selling of the USD. If the ECB decides not to cut rates (which I don’t suspect they will do), the EUR could rally. But oil is going to be the USD’s worst enemy, the oil price needs to stabilize before the USD can really regain ground. This could happen if the Federal Reserve increases interest rates, but any rise in the USD would be offset by a major conflict in the middle east, or a new cold war with Russia (Russia could cut it’s oil output).

The commodity markets haven’t finished their bull run. The food markets will fluctuate again, as the developing countries may have crop failures and the festival season in India kicks off; so demand will increase for Rice, wheat, sugar, even Bananas could be at peak production cycles; we could see a major price hike in all food commodities depending on the demand from India and China.

Of course this leads to inflation. All economies are grappling with high oil and food prices, we may not see this diminish. The commodity inflation issues, as mention above could solely be a demand issues and scarcity issue. We could be peak commodities, depending on how robust the mining industry can continue output on iron ore and other metals. But peak phosphorous is just around the corner, we could see other metals and minerals peaking also.

Morbius glass with still follow recession conditions in world economy, there will be two new additions to commentary the on global markets and economy they are: morbius glass: Energy markets, Commodities and Geopolitical analysis and morbius glass: FX watch

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Bear Markets, sucker rallies, looming credit defaults

Posted by Adrian on July 25, 2008

The depressed US housing market is continuing to erode confidence in the banking sector, stocks, profits etc. With the banks in the US reporting losses, the Dow and S & P 500 now all in bear market territory staged ‘sucker rallies’ on the premise that bank losses were ‘not as bad’ as first estimated. These recent rallies have been wiped away with the Dow losing 283.10 points (July 24th 2008 ) bringing the index down to 11,349.28 points

The main concern is the collapsed credit markets, as banks still hold deprecating assets, usually any sort of secularization that is tied into (US) mortgage backed securities. Also the costs of protecting credit defaults swaps is increasing as the likely hood of high risk company defaults could increase towards the end of 2008.

The Markit iTraxx measure is showing Asia, Australia moving up; as the pricing for CDO’s for bigger companies becomes more expensive. The price orientated default risks are a good indicator of how the market sees company debt.

The Markit iTraxx Asia index (excluding Japan) rose 523 +

Australia’s Markit iTraxx index rose 133+

(from Bloomberg data)

The Australian rise in the CDO’S iTraxx market could be on the back of The National Australia Bank increase of cash provisions of $830 million, this was tentatively explained in response to decaying US credit markets (namely housing and MBS and CDO markets). But I would say Australian banks are more concerned about domestic company/housing credit defaults, if not more, than the US credit markets which are so decayed now – it is essentially a dead market. But never the less the portfolio of bank assets in Australia could be very problematic. Not only do they (Australia banks) appeared to have held a lot of toxic waste assets from the CDO markets (US mortgage backed securities), but they will be major worries of the over leveraged and local housing bubble – that was fueled by banks feeding outsourced credit into the local housing market.

Australian banks are undoubtedly in a bad situation with major funding issues from asset depreciation both internationally and local. No wonder their is a major sell on their stocks.

Bear Markets now seem synchronized on global stock indexes, Brazil which has a completely out of control inflation problem has now enter a bear market with their stocks with the IBOVESPA now sitting at 57,434 points a decline from May 20th 2008 peak of 73,517 points – a huge fall of 16,083 points or a 22% drop.

please refer to graph, Brazilian BVSP compared with the US dow

(please note the 3yr graph above is running real time daily statistics)

As mentioned in Gold and oil drop, stocks maintain rallies, in regards to the recent week of stock market rallies. The global credit crunch will now enter the bankruptcy stage, with not only banks finding hard to raise capital; but companies that have over leveraged and will find it hard, if not completely unable to refinance debt. Another aspect to watch, will be at some point the banks will cut credit lines to consumers.

I suspect a sharp increase in unemployment figures globally in the next 6mths.

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