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Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.
Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.
In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.
So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.
Yowza is the word that comes to mind when looking at the major stock gauges. The DJIA has burst through 9,000 and the S&P 500, up 2.2%, at 975. Reuters is chalking it up to strong second quarter earnings and a pop in existing home sales. The pace of the rally in recent weeks, however, is starting to send signals that this may be overdone.
David Rosenberg, chief economist over at Gluskin Sheff, notes that that the pop so far in the second quarter is pricing in unrealistic economic growth.
In line with the grim mood taking hold of financial markets, S&P’s Dianne Vazza just emailed around a report that drives home the point. U.S. companies are still struggling even if access to credit markets has improved.
Thanks to a nice boost from government intervention in short-term markets, the risk premium on the S&P index for investment-grade corporate bonds fell more than 270 basis points from a peak of 578BPs in mid-Dec. Yet in the last 12 months, S&P axed corporate credit ratings 229 times, the highest number in a one-year period since March 1990 to March 1991. And there’s likely more to come, with 27.5% of all investment-grade issuers on watch for a downgrade or with a negative outlook that signals a company is heading in the wrong direction.