Economy
This week European central banks (BOE, ECB, Sweden) slashed interest rates in a bid to deal with the worsening global crisis, but the mood remains grim. Investors continue to fret about the global economic and corporate outlook. Bond yields in both US and Europe reached historic lows and credit spreads made all new highs.
So what can we take away from the state of the economy now?
a) Low UK sterling: GBP has had 5 major declines in the last 20 years and each averaged 20% frrm peak to trough against the USD. But since the 26 year high of $2.11/GBP acheived in November 07, it has fallen 30%. The number of short position contracts on the pound is still at historic highs and although there is talk that it may fall further to $1.30, there are more interesting ways to play a weakening gbp such as buying UK companies with high overseas exposure.
b) CDX main, ITraxx X/O all made new highs this week. Looking back at Jan 07 when X/O rose from 340 bps to 550 bps in 2 weeks, the market was shell-shocked, but this week, X/O breached 1000bps, i.e. the cost of buying protection on high yield corporate bonds are > 10% now. Markets seems to be overpricing in a fear of major financial disruptions in the last 2 weeks of 2008, and currently imply a 63% rate fo default versus historic peak of 32% in 1932. IS it the time to sell protection ? Single names are being decimated, but the economy cannot recover until credit spreads fall. To play the credit theme, Insurance names and companies with high FCFs are preferred.
c) US unemployment rose to 6.7% and the non-farm payrolls figures exceeded the worst expectations of economists polled by Bloomberg. However, looking back at the last 2 crisises in the early 1980s and 1992, unemployment rates were 10.1% and 7.8% respectively, so it's highly likely that we can expect more job cuts into the new year.
Eric Tan, London
No comments:
Post a Comment