High Yield Suffers as Market Fears Ensue
October 24th, 2008 Posted in In-Depth Analysis
Warning signals were heard loud and clear during Wednesday’s trading session as financial markets began ripping towards a recession. Equities, currencies and commodities that have generally posted high yields suffered heavy losses. The price volatility we have seen over the past few sessions have been extraordinary.
Oil shed 7.5%, the GBP/USD dropped to a 5 year low and the Dow Jones Industrial Average recorded the seventh largest drop in its history.
What is contributing to the plummeting asset values?
Recessionary fears are pushing assets lower. These are stemming straight from the gut and are having a snowball effect on the markets. As hedge funds and institutional investors unwind large positions that have gone south, the deleveraging is destroying asset values.
A global slowdown has pushed the price of oil lower, reduced corporate profits, and lowered GDP growth forecasts. Any positive signal that comes from the market is currently being ignored.
Who is the biggest beneficiary of the yesterday’s slide? Low yielding currencies such as the Dollar and the JPY.
The Dollar saw gains across the board against with the only exception coming against the JPY. The greenback reached new highs against the EUR, GBP, and a basket of emerging market currencies. Emerging market currencies have been pummeled in recent weeks.
Prior to the beginning of the credit crisis that began with a sever drop in the U.S. housing market, emerging market equities and currencies provided the greatest room for growth and risk taking. A struggling global economy with sever credit restrictions clearly reduces risk appetite and in turn hurts higher yielding currencies.
In times when risk aversion is high, investors flock to the safety of the Dollar and the JPY. This is why we have seen the EUR/USD drop 574 pips in two days and the JPY appreciate 489 pips on the Dollar over the same time period.
