Markets melting down – Back to the Future: 2008 again?

Earlier this week I posted a hypothetical look at markets from the point of view of someone who had just returned from holidays. But any sense that the consolidation might persist before the weak global economic data reassert itself is I think washing away.

When I saw the Wall Street Journal article about the Fed checking on European banks this week I confess to sensing a dire outlook for markets in the wake of such a revelation.

Markets are certainly complex and fickle beasts and when facing such a great deal of uncertainty can become a daunting place to be. This news story, in and of itself, is and was enough to send markets into a sort of post Lehman funk we saw in 2008. The rational thing is if the Fed is worried then we had better be too.

Already in Australia during the equity sell off last week we saw a window into the future with a mini credit crunch. Investors went to cash and cash only in the money markets. It only lasted a day because of the equity bounce but it was an uncomfortable reminder of what might again occur.

Now we are on record recently as saying that markets looked like they may be forming a base and from a purely technical perspective we expected a bounce but its sustainability would be tested over the months ahead. Well that question of sustainability appears to have been asked and answered much sooner than we had thought as the data has continued to deteriorate.

Indeed markets had held up quite well over the past few days in the wake of poor growth figures from Europe and weak activity indicators in the US as well as another EU summit that was strong on rhetoric but light on action. However last night we hit another tipping point. The news from Europe was quite concerning with reports surfacing that Finland has demanded some form of collateral for any further pledges made to Greece. The reports then cited that Austria, the Netherlands, Slovakia and Slovenia were all making similar demands. Coming on top of the Fed story this move will only create further uncertainty and undermine the markets confidence and trust in EU officials ability to deal with the crisis.

Then in the US we got another wave of weak data lead by the weekly jobless claims report and existing home sales, however it was the Philadelphia Feds manufacturing index which was the most disconcerting. The Philadelphia Fed manufacturing index collapsed from 3.2 to -30.7, to its lowest point since the height of the contraction during the last quarter of 2008, confirming just how weak the US economy is at present. It was only in March that the index hit a near 30 year high of 43.4. The outlook is equally as bleak with the new orders index dropping from 0.1 to -26.8.

Obviously at this point we must highlight that one trading session, like one month’s data, does not make always trend. But last nights move is not out of context with the data, the bounce was. The spike in volatility, the pace of the deterioration in the data globally, the growing evidence that EU officials lack the ability to solve the EU crisis and the Fed’s limited options are certainly suggesting there is increased downside for markets.

I hate to write this but what we saw in Australian money markets last week, ever so briefly, our past could be our future once more.

Except this time it could be much worse – markets now know there is little fiscal space, political will or indeed actual ability for the governments and central banks of the world to ride in, John Wayne style, and save the day.

The outlook for risk assets has deteriorated materially. In the lead up to GFC I, the bond market moved early to price in the pending slowdown in the economy while equity markets continued to surge higher. Overnight  the US 10 year US Treasury yield  fell below 2% for the first time on record and could be a sign of things to come. 

As an aside – I’m on holidays till September 6th, at least that’s what Mrs McKenna is telling me, so posts will be less frequent than usual. Now doesn’t feel like a good time to step away and while I am 100% cash I know not everyone is.

Circumspection is paramount at present unless you are a genuine trader or risk seeker as I know many also are.

Greg McKenna – on the road
Melbourne Airport
Via WordPress Mobile

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