The Fear Is Still Out There

There’s a lot of things to be said about fear; fear in general and fear as a driving force in the financial markets. Some say the fear is the only driving force in the market – the fear of losing money and the fear of underperforming ones competitors. The first kind should restrain investors from taking too much risk, the other should (in theory) increase their risk appetite. In other words; fear amongst market participants is really a good thing. But the central banks have in reality more or less eliminated the risk element with its quantitative easing policy. So, why is fear still an issue?

“Spreads opened wider this morning, with Ireland and the threat of contagion across the euro zone’s periphery continuing to incite risk aversion.”

Gavan Nolan


The Markit iTraxx SovX Western Europe index hit 187 basis points, Wednesday, another all-time-wide, as investors are said to fear the contagion of debt problems from one country to another.  Credit markets recovered in the afternoon after a shaky start, but the ongoing peripheral concerns ensured that they underperformed their counterparts in equities.

CDS spreads opened wider Wednesday  morning, driven by Portugal and Spain, with Ireland and the threat of contagion across the euro zone’s periphery continuing to incite risk aversion, according to Markit Financial Information Service.

Ireland’s rating was downgraded two notches to A from AA- by S&P’s Tueasday evening, the agency citing the rising cost of bailing out the country’s banking system.

Ireland’s spreads have been trading in junk territory for some time but the downgrade only added to the negative sentiment, credit analyst Gavan Nolan at Markit Credit Research writes in Wednesday’s Intraday Alert.

The government’s “National Recovery Plan”, a four-year plan inflicting yet more austerity on the Irish people, was unveiled today. It amounts to a EUR15 billion fiscal tightening; EUR10 billion in spending cuts and EUR5 billion in tax hikes.

“But whatever the merits of this policy – and many doubt its efficacy and its optimistic growth assumptions – there is considerable uncertainty over whether it will be implemented at all. The government’s position is precarious and it will have difficulty getting the necessary votes to pass the December 7 budget,” Nolan points out.

The Irish CDS’ are now trading with spreads around 590 bp’s, similar to pre-bailout levels.

“Contagion was still the buzzword today and this was reflected in sovereign spreads this morning,” Markit’s analyst notes.

The Markit iTraxx SovX Western Europe index hit 187bp, an all-time record, driven by Portugal and Spain.

The Iberian countries are viewed by the markets as being the next most vulnerable to a debt crisis. However, they recovered later in the day, but remain at unpleasant high levels.

And financials continued to underperform amid sovereign volatility and concerns over burden sharing – or the possibility of being bailed in, instead of out.

I guess that’s where the real fear is…

Anglo Irish Bank’s debt exchange was deemed a restructuring credit event by the ISDA DC today, and a credit event auction will follow in the coming weeks.

“Risky assets enjoyed a stronger afternoon, helped by a plethora of economic data,” Gavan Nolan writes pointing to the US weekly jobless claims that came in better than expected, as did UofM consumer confidence.

New homes sales and durable goods figures were less impressive but investors were ready to put them aside ahead of Thursday’s US holiday.

“With US news likely to be minimal over the rest of the week, events in the euro zone should shape spread direction on probable low volumes,” Gavan Nolan concludes.

When it comes to fear in general, the wise men says it’s all in the mind, and that there’s nothing to fear but fear itself.

Obviously, most investors thinks that’s all just bull-shit.

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