Risk Appetite and Carry Interest may soon Lose Their Balance
Posted 02-19-2010 at 11:10 AM by DailyFX
After a week of severe volatility as the market made a critical and dispassionately blunt assessment of the global market’s health, it was only natural that things would even out. With the winds of risk aversion blowing at a category 3 hurricane force, it wasn’t difficult to point out burgeoning problems like Greece’s potential default or China’s efforts to curb growth and speculation. However, without specific catalysts, a temporary balance would return.
• Risk Appetite and Carry Interest may soon Lose Their Balance as Greece and the Fed’s Hike Build Pressure
• Removing Government Stimulus has Moved from Abstract Warnings to Clear Action
• With Financial Risks Growing Can Expected Returns Keep Pace?
After a week of severe volatility as the market made a critical and dispassionately blunt assessment of the global market’s health, it was only natural that things would even out. With the winds of risk aversion blowing at a category 3 hurricane force, it wasn’t difficult to point out burgeoning problems like Greece’s potential default or China’s efforts to curb growth and speculation. However, without specific catalysts, a temporary balance would return. Does this mean that the we have found a level of equilibrium for the immediate future? No. The market simply awaits the next trigger and clear bearing on the building or unwinding of speculative positions before the crowd throws its conviction behind the one direction or the other. And, there are plenty of individual financial concerns that can spark the contagion of outright panic – that is as long as investors are alert and susceptible to bearish news. Looking outside of the fundamental tides that can feed risk aversion and risk appetite; we can see that traders are exposed because of the overly optimistic bearing through the market itself. In terms of progress, the Dow Jones Industrial Average and Carry Trade Index have barely retraced the record-breaking advances they posted through 2009. Historically, the 2009 rally was the most aggressive in history. Born of a massive return of speculative capital following a unprecedented crisis (the Great Depression didn’t have the speculative concentration nor the global interconnectedness that the markets encompass today); this influx inflated asset values beyond what the feeble economic recovery could promise. After having gone through the stages of a staunched inflow of capital, tempered expectations of quick capital gains and an admission of linger fundamental problems; we are now to the point where expectations are being reconciled to reality.
Taking a look at the macro economy and turning over a few rocks will yield no shortage of fundamental troubles. However - as anyone that has enough experience with the markets can tell you - sentiment and the promise of returns can keep investors blissfully ignorant of the risks. This is the case until the outlook for returns throttles back or the risks grow too large to ignore. Right now, we are experiencing a bit of both of these conditions. Having stalled out at the end of the year, the benchmark asset classes are no longer producing capital returns which leaves market participants dependent on yield income. Yet, dividends, coupon and interest payments are tied to an exceedingly frail economy that cannot support the necessary returns to support current levels. Therein lies the vulnerability to signs that conditions are worsening. Currently there is no shortage of severe threats to financial stability. Recently, the Federal Reserve took the remarkable step of hiking the US discount rate. This is not the same thing as raising the Federal Funds rate; but the implications domestically and global are nonetheless profound. The world’s largest central bank took a clear step towards withdrawing stimulus by reducing banks’ access to cheap loans. Realistically, this is just another step in a gradual shift worldwide to rollback the safety net and allow the market to stand on its own. Perhaps the more explosive risk though is the situation in the European Union. Greece needs capital to roll out its existing debt and establish a recovery. At the same time, the nation has to comply with the EU’s rules. There is no scenario where everyone comes out unscathed. What makes it worse, Greece isn’t the only burden for the EU.
Is Carry Trade and risk appetite rising or falling? Discuss how to trade yields and market sentiment in the DailyFX Forum
Read more: www.DailyFX.com
• Risk Appetite and Carry Interest may soon Lose Their Balance as Greece and the Fed’s Hike Build Pressure
• Removing Government Stimulus has Moved from Abstract Warnings to Clear Action
• With Financial Risks Growing Can Expected Returns Keep Pace?
After a week of severe volatility as the market made a critical and dispassionately blunt assessment of the global market’s health, it was only natural that things would even out. With the winds of risk aversion blowing at a category 3 hurricane force, it wasn’t difficult to point out burgeoning problems like Greece’s potential default or China’s efforts to curb growth and speculation. However, without specific catalysts, a temporary balance would return. Does this mean that the we have found a level of equilibrium for the immediate future? No. The market simply awaits the next trigger and clear bearing on the building or unwinding of speculative positions before the crowd throws its conviction behind the one direction or the other. And, there are plenty of individual financial concerns that can spark the contagion of outright panic – that is as long as investors are alert and susceptible to bearish news. Looking outside of the fundamental tides that can feed risk aversion and risk appetite; we can see that traders are exposed because of the overly optimistic bearing through the market itself. In terms of progress, the Dow Jones Industrial Average and Carry Trade Index have barely retraced the record-breaking advances they posted through 2009. Historically, the 2009 rally was the most aggressive in history. Born of a massive return of speculative capital following a unprecedented crisis (the Great Depression didn’t have the speculative concentration nor the global interconnectedness that the markets encompass today); this influx inflated asset values beyond what the feeble economic recovery could promise. After having gone through the stages of a staunched inflow of capital, tempered expectations of quick capital gains and an admission of linger fundamental problems; we are now to the point where expectations are being reconciled to reality.
Taking a look at the macro economy and turning over a few rocks will yield no shortage of fundamental troubles. However - as anyone that has enough experience with the markets can tell you - sentiment and the promise of returns can keep investors blissfully ignorant of the risks. This is the case until the outlook for returns throttles back or the risks grow too large to ignore. Right now, we are experiencing a bit of both of these conditions. Having stalled out at the end of the year, the benchmark asset classes are no longer producing capital returns which leaves market participants dependent on yield income. Yet, dividends, coupon and interest payments are tied to an exceedingly frail economy that cannot support the necessary returns to support current levels. Therein lies the vulnerability to signs that conditions are worsening. Currently there is no shortage of severe threats to financial stability. Recently, the Federal Reserve took the remarkable step of hiking the US discount rate. This is not the same thing as raising the Federal Funds rate; but the implications domestically and global are nonetheless profound. The world’s largest central bank took a clear step towards withdrawing stimulus by reducing banks’ access to cheap loans. Realistically, this is just another step in a gradual shift worldwide to rollback the safety net and allow the market to stand on its own. Perhaps the more explosive risk though is the situation in the European Union. Greece needs capital to roll out its existing debt and establish a recovery. At the same time, the nation has to comply with the EU’s rules. There is no scenario where everyone comes out unscathed. What makes it worse, Greece isn’t the only burden for the EU.
Is Carry Trade and risk appetite rising or falling? Discuss how to trade yields and market sentiment in the DailyFX Forum
Read more: www.DailyFX.com
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