pofme.com A Potential Greek Default,
Upcoming UK Election and Rising Sovereign Debt Risk
Threatens the FX Market
Posted by POFME on April 23rd, 2010
If we were to apply the United States Department of
Homeland Security’s Threat Level System to the
global financial markets, we would surely be in the
orange sector (‘high’ risk) moving on to red
(‘severe’ risk). There has been a range of
fundamental uncertainties that have undermined the
outlook for a stable and healthy future for growth
and investment turnover; but investor sentiment (as
irrational as human behavior itself) has maintained
its bullish bearing thanks to the hope for higher
returns and a general disregard of building risks.
• A Potential Greek Default, Upcoming UK Election
and Rising Sovereign Debt Risk Threatens the FX
Market
• Risk Factors Multiply for the Currency and
Financial Markets but Benchmark Remain Stubbornly
Buoyant
• The IMF Upgrades Growth Forecasts, Switches
Concern from Write Downs to Government Deficits
If we were to apply the United States Department
of Homeland Security’s Threat Level System to the
global financial markets, we would surely be in the
orange sector (‘high’ risk) moving on to red
(‘severe’ risk). There has been a range of
fundamental uncertainties that have undermined the
outlook for a stable and healthy future for growth
and investment turnover; but investor sentiment (as
irrational as human behavior itself) has maintained
its bullish bearing thanks to the hope for higher
returns and a general disregard of building risks.
However, feigning ignorance to the immediate and
distant threats to stable markets is growing
exponentially more difficult. Not only are the
relentless concerns over a downshift in economic
expansion and ballooning government debt hanging
over the market; but now there are immediate
concerns that have the capability to spark an actual
crisis. News of Greece’s deficit revision (its ratio
to GDP was increased) and the subsequent downgrade
to its national credit rating adds significant
pressure to an already strained market. And yet,
price action has yet to bear out the increased risk.
Looking to the benchmarks for the financial markets,
the Dow Jones Industrial Average has maintained its
incredible two-and-a-half month climb while US-based
crude oil futures have held above $80 per barrel.
For the currency market, the Carry Trade Index has
climbed back up to test the swing highs from October
and January with notable returns from high yielders
like the Australian dollar and stubbornness from
fundamentally-weakened currencies like the Euro.
This dramatic divergence between expected value and
realized price doesn’t come as a surprise
considering how long the markets have run askew of
fundamentals. However, the sheer lack of risk
premium in instruments like default swaps, options
and volatility gauges in the face of such events
presents a blaring warning sign for how significant
a correction in sentiment and markets can be.
For the speculator, taking on risk for the
prospect of moderately higher return is perhaps easy
to justify. Given the capital appreciation through
2009 and the initial recovery in yields (which
traditionally translates into capital gains as
well), investors see the opportunity to recover from
losses suffered during the financial crisis and take
advantage of extraordinarily low rates on loans and
leverage. As for the risks entailed with exposing
themselves to the possibility of a significant
correction from overextended markets, well, there is
a precedence for government intervention to stem the
bleeding. However, the world’s governments are
already pushed their limits to the point where
sovereign debt risk is now the IMF’s (International
Monetary Fund) primary concern for financial
stability going forward. What does that mean? If
indeed there was a crisis, policy officials may be
unable to save the day – whether they wanted to or
not. For this reason, it is essential to monitor the
most fluid situations and the market’s
interpretation of these imposing matters. The most
pressing threat is Greece’s future. The EU and IMF
are struggling to come agree on terms to craft a
viable rescue package for the pained economy. This
is particularly concerning given doubts that the
full measures of the rumored bailout would not
likely salvage the country regardless. Since
receiving a tentative promise of up to 45 billion
euros, the nation’s deficit ratio was boosted to
13.6 percent (from 12.7 percent) and Moody’s has
downgraded the country to investment grade. The
potential here is violent; but ultimately it would
only be a spark for even greater troubles. The next
dominos to tip could be credit liquidity and
sovereign debt yields
Posted in
Business
Tags:
debt,
default,
election,
fx,
greek,
mark,
potential,
rising,
risk,
sovereign,
threatens,
uk,
upcoming
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