Photo: swamibu via flickr
Good commentary from Citi’s Steve Englander on the post-FOMC trading.Essentially people are dumping everything, even the “Family Jewels,” as he puts it. To put it another way, when there’s a mass cascade, you just gotta sell everything.
The proximate source of this panic is difficult to identify. The most plausible explanation may be that investors were waiting to see if a ‘hail Mary’ surprise QE3 announcement would boost markets. The reaction by markets to the Fed’s ‘twist’ is the same as that of home team fans when their team is behind 9-0 in the eighth inning and the manager has just put an outfielder in as pitcher. When the Fed passed on QE3, global investors saw the risk that pressures on US and European banks from downgrades and sovereign exposure would lead to bank balance sheet deleveraging. CDS has gone up across the board. French CDS is above 200 and now is at the same level as Spain six months ago and well above where Italy was earlier this year (Figure 1). The European banks index is back down close to the lows of this year, and not much above the 2009 low (Figure 2).
We certainly left Singapore last week struck by how poor sentiment was with respect to the global financial system and this has been reiterated by other colleagues visiting Asia. Investors have responded by trimming positions and causing a cascade of stop-losses. So far there is no sign that either official or private value investors are stepping in to scoop up bargains. Tomorrow the G20 Finance Ministers meet, but it doesn’t seem likely that they will cobble together a statements or comments that will reassure markets. The fear of financial transmission is key to the global sell-off and unwinding the acute pessimism would require some assurance that balance sheets in Europe and elsewhere will not be deleveraged, assurance that has been lacking thus far.
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