September 16, 2008 --- The Friedrich Moment
ü That which does not kill us makes us stronger. ---- Friedrich Nietzsche
ü It’s the worst I’ve seen and still more to go --- Alan Greenspan
Equity Market --- The S&P had its worst session since 911 following the weekend news on Lehman and Merrill, as the Fed denied a bridge loan for AIG and as Paulson appeared to signal that there will be no more Federal money for bail-outs. Markets lost confidence after there was no follow-up news on reports that the Fed had brokered a US$75 bn consortium loan for AIG - this was almost double the US$40bn the ratings agencies had asked for to stave off a ratings downgrade (which might trigger a margin call on CDS fpor the insurance giant and potential bankruptcy). No news is bad news in these markets. AIG was down 60% on the day.
Volatility Market --- The good news is that fear levels are getting elevated. At 31.7, the VIX is almost where it peaked in mid-March. But, it is still well short of the 45 level it peaked at in July 2002. But it is moving in a straight line so we should see peak fear levels in a matter of days. Where that will leave the indices is another issue. The S&P dropped 15% in the last five days of the July 2002 decline so we could easily see another 10% on the S&P on top of last night's decline if things get truly climactic.
Money Market --- Few will believe that a Fed rate cut on Wednesday will stop the rot. The September Fed funds futures rallied 8.25 bps overnight, which means the market is pricing in a 76% chance of a 25 bps rate cut on Wednesday. If we don't get it, the Fed will just have to cut even more inter-meeting. Markets will make sure of that. The Fed's easiest course will be to cut 50 bps but this FOMC has not shown itself to be that market savvy. The yield curve out to 2 years has turned negative again -- that's down from over +100 bps in mid-May. This signifies that the money market is starting to contemplate recession. So long as the yield curve stays there the Fed will have no choice but to cut by at least 50 bps. Don't rule out the possibility that we have a 1% Fed funds rate before this week is through.
HK/CN Market --- HK remains to be seen how the A-share market will react to the PBoC's decision to cut the one-year lending rate by 27 bps to 7.2% and to cut RRR for smaller banks (100bps). In all likelihood the market will take it as a sign that
Oversea Market Review
Investors responded to this weekend’s developments on Wall Street with aggressive selling of risk assets in favor of government bonds or cash.
Global equities plunged 3.4% on Monday, down around the world. Stocks slumped 4.6% in the
A major, sustained tightening in financial conditions probably would ensure a recession in the fragile G3 economies. Not all of the market developments were bad for the economy, however. The continued slide in oil prices is an important positive for consumers and businesses in oil-importing nations. 1MWTI oil dropped $5.41 to $95.71/bbl—below $100 for the first time in six months