Caused collapse of Global Market in US
It has been little more than two months since global markets were roiled by a collapse in the US sub prime debt market prompting emergency liquidity infusions from the world’s largest central banks. Nevertheless, much of the losses from the massive flight from risk have been virtually erased. Does this hearty return of risk appetite suggest that the worst of the credit crunch is behind us? Or, could we experience another, perhaps more painful period of contraction? What will happen to the dollar, already at record lows and still vulnerable to further Fed rate cuts? To better understand what is at risk, it is important to recount the fallout from July and August, review what steps were taken to buttress the markets and analyze what risks still loom on the horizon.
The turn in global markets happened innocuously enough in mid-July. Though the equity, debt and FX markets were ominously correcting at the same time; their initial losses were modest. The gradual change in global investor sentiment through the summer began in the US as fears that the subprime mortgage sector was on the verge of collapse were suddenly realized. The first major casualty of a rise in subprime defaults was Bear Stearns’ High-Grade Structured Credit and High-Grade Structured Credit Enhanced Leveraged Funds.
However, it wasn’t until hedge funds and banks outside the US borders reported losses from investments related to American mortgage backed securities that panic peaked. And, when the fuse of fear was lit, concern spread rapidly to all assets that were considered risky or otherwise overbought. In the currency market, the carry trade suffered extreme volatility and massive drawdowns. To grasp the change in market conditions, volatility in USD/JPY (one of the most liquid carry trades) surged from an all-time low to a five year high in a matter of weeks.
In terms of price action, the top yielding carry trades saw substantial declines:
The turn in global markets happened innocuously enough in mid-July. Though the equity, debt and FX markets were ominously correcting at the same time; their initial losses were modest. The gradual change in global investor sentiment through the summer began in the US as fears that the subprime mortgage sector was on the verge of collapse were suddenly realized. The first major casualty of a rise in subprime defaults was Bear Stearns’ High-Grade Structured Credit and High-Grade Structured Credit Enhanced Leveraged Funds.
However, it wasn’t until hedge funds and banks outside the US borders reported losses from investments related to American mortgage backed securities that panic peaked. And, when the fuse of fear was lit, concern spread rapidly to all assets that were considered risky or otherwise overbought. In the currency market, the carry trade suffered extreme volatility and massive drawdowns. To grasp the change in market conditions, volatility in USD/JPY (one of the most liquid carry trades) surged from an all-time low to a five year high in a matter of weeks.
In terms of price action, the top yielding carry trades saw substantial declines:
- NZD/JPY plunged 24 %
- AUDJPY sank 20.1 %
- EUR/JPY dropped 11.6 %
- USD/JPY fell 10.1 %
Equities saw similar extremes. The VIX volatility index jumped from 13 year lows to its highest level since the dot com bubble burst. In the fray, the Dow lost 10.7 percent. Proving the markets are truly global, the Nikkei dropped 16.6 percent and the FTSE 100 fell 13.8 percent in sympathy.
AUDNZD Technical Fundamental
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