Liquidation and de-risking was the order of the day
yesterday, as equities, commodities, currencies (except the USD) and
confidence fell broadly and sharply across the globe. The Federal
Reserve’s assessment of the current economic situation continued to
resonate and with a further deterioration in the PMI data for the
Eurozone and the preliminary HSBC measure for China, uncertainty
continued to rise.
There is no doubt that the global economic backdrop has deteriorated so sharply that it warrants a correction in the equity and broader ‘risk assets’, however, the most recent deterioration in global consumer and business sentiment has been a function of rapidly declining confidence. Declining confidence has been a function of increasing uncertainty over the future economic (and political) outlook and this looks set to continue. Insurance against sovereign default (CDS) has surged as a result of this uncertainty with the CDS of Germany, France, Italy and Spain all hitting record highs yesterday.
Goodhart’s law suggests that using one economic indicator as a target for the purpose of conducting economic policy, causes the indicator to lose the information content that would qualify it to play such a role. In financial market terms, all traders across all asset classes will have a number of variables that they will use as barometers of sentiment or direction (‘economic indicators’); whether this is the S&P or gold, or oil, (or any number of indices rates or spreads) to gauge current market sentiment. Volatility has picked up markedly over recent days and I would caution against any overreliance on an ‘indicator’ in the current risk averse climate.
An interesting example of this in yesterday’s trading was that commodities were also hit hard, even the traditional safe haven plays of Gold and Silver, as position unwinding in commodities, and more significantly in emerging market (EM) currencies over this month (which really capitulated after the FOMC) played out. I would expect some further capitulation in commodities and EM currencies as position unwinding continues over the coming days but would caution against being too ‘short of risk’ or risk assets into the weekend as the possibility of an event such as French Government recapitalisation of its banks, is not negligible.
Rhetoric and accusation continue to be the preference of global policymakers when action is needed. I have suggested before on this blog that it is the ‘INaction of governments and not the actions of markets’ that have driven the crisis (in response to accusations by officials that it is financial market speculators that have been responsible for various market anomalies). Pimco’s El Erian said yesterday that “the world has gone through a period of policy dithering” and that “the world is on the eve of the next financial crisis”. His first point I couldn’t agree with more, his second, in my view, is still avoidable. Just.
International Monetary Fund head Christine Lagarde mirrored the sentiment in reiterating that the “world economy is entering a dangerous phase” and that she sees “a narrower path for recovery”.
Now is the time for policy makers to stand up and take action within the eurozone or the implications for global confidence (and by default economic activity) could be extreme.
A Bloomberg survey of economic confidence, released yesterday showed that the percentage of Americans with a positive outlook currently stands at a mere 12 percent. This is likely to be mirrored across the globe, showing the extent of the impact recent events have had on confidence and it will take more than a letter signed by six of the G20 leaders urging action to be taken to reverse it.
Until decisive action is taken to resolve the imbalances in the Eurozone, and to a certain degree the ongoing political impasse in the U.S., uncertainty and lack of confidence will continue to dominate the global economy and the recent trends in FX and broader financial markets are likely to continue.
There is no doubt that the global economic backdrop has deteriorated so sharply that it warrants a correction in the equity and broader ‘risk assets’, however, the most recent deterioration in global consumer and business sentiment has been a function of rapidly declining confidence. Declining confidence has been a function of increasing uncertainty over the future economic (and political) outlook and this looks set to continue. Insurance against sovereign default (CDS) has surged as a result of this uncertainty with the CDS of Germany, France, Italy and Spain all hitting record highs yesterday.
Goodhart’s law suggests that using one economic indicator as a target for the purpose of conducting economic policy, causes the indicator to lose the information content that would qualify it to play such a role. In financial market terms, all traders across all asset classes will have a number of variables that they will use as barometers of sentiment or direction (‘economic indicators’); whether this is the S&P or gold, or oil, (or any number of indices rates or spreads) to gauge current market sentiment. Volatility has picked up markedly over recent days and I would caution against any overreliance on an ‘indicator’ in the current risk averse climate.
An interesting example of this in yesterday’s trading was that commodities were also hit hard, even the traditional safe haven plays of Gold and Silver, as position unwinding in commodities, and more significantly in emerging market (EM) currencies over this month (which really capitulated after the FOMC) played out. I would expect some further capitulation in commodities and EM currencies as position unwinding continues over the coming days but would caution against being too ‘short of risk’ or risk assets into the weekend as the possibility of an event such as French Government recapitalisation of its banks, is not negligible.
Rhetoric and accusation continue to be the preference of global policymakers when action is needed. I have suggested before on this blog that it is the ‘INaction of governments and not the actions of markets’ that have driven the crisis (in response to accusations by officials that it is financial market speculators that have been responsible for various market anomalies). Pimco’s El Erian said yesterday that “the world has gone through a period of policy dithering” and that “the world is on the eve of the next financial crisis”. His first point I couldn’t agree with more, his second, in my view, is still avoidable. Just.
International Monetary Fund head Christine Lagarde mirrored the sentiment in reiterating that the “world economy is entering a dangerous phase” and that she sees “a narrower path for recovery”.
Now is the time for policy makers to stand up and take action within the eurozone or the implications for global confidence (and by default economic activity) could be extreme.
A Bloomberg survey of economic confidence, released yesterday showed that the percentage of Americans with a positive outlook currently stands at a mere 12 percent. This is likely to be mirrored across the globe, showing the extent of the impact recent events have had on confidence and it will take more than a letter signed by six of the G20 leaders urging action to be taken to reverse it.
Until decisive action is taken to resolve the imbalances in the Eurozone, and to a certain degree the ongoing political impasse in the U.S., uncertainty and lack of confidence will continue to dominate the global economy and the recent trends in FX and broader financial markets are likely to continue.
No comments:
Post a Comment