Today’s markets need noise filters

June 24, 2009

Agnes Crane — Agnes T. Crane is a Reuters columnist. The views expressed are her own —

Reasons people give to explain the quick switch-back movements in stocks and other risky assets are becoming, well, just bizarre.

On Monday, it was the World Bank’s dire outlook for the global economy — no matter that the organization’s president already said output was likely to decline by close to three percent earlier this month.

On Tuesday, it was Moody’s Investors Service reaffirming the Aaa rating of the United States that gave stocks a brief lift, even though few expected any rating agency to make a move on its credit standing any time soon.

Investors should take these kinds of explanation and moves with a grain of salt, especially during the summer months when trading volumes are light and conviction easily undermined.

Those taking the long view shouldn’t let the noise, whether it be a World Bank report on the economic outlook or a perceived change in a data point, distract them from the fact that the financial system is still on life support and therefore susceptible in a very real way to a downturn once governments start to pull the plug.

The Federal Reserve is well on its way to purchasing $1.45 billion of mortgage-related assets in addition to $300 billion of Treasuries, which it could expand if central bankers decide they need more power to drive down interest rates.

This week, in an attempt to drive down rates even further, the European Central Bank is offering funds at a bargain basement rate of one percent for one year. The Bank of England, meanwhile, is keeping rates in that country at a record low while earmarking 125 billion pounds to buy up debt as part of its quantitative easing policy. And the list goes on.

The trillions of dollars injected into the global financial system have helped bolster short-term lending markets to such an extent that few are even talking about such hot-spot gauges as Libor/OIS that flashed beet red last year when banks balked at lending to one another.

By driving down short-term borrowing costs, this money, among other things, encourages banks and investors to invest in higher-yielding, riskier assets that had been beaten down by the crisis.

The return of risk appetite has in turn bred comfort that things are returning to normal. But they’re not, yet.

That’s why the timing of when governments begin to mop up this excess liquidity will be key to where markets go from here. There will be plenty of trading opportunities between now and then, to be sure, but it will be some time before we’ll see anything that we can call normal. Yet, normalcy is what many crave.

Many had hoped that the run-up in stocks and other risky assets since March was the real deal — a sustained rebound, in the manner of 2003.

Real money had been moving into stocks and risky corporate debt not because of isolated headlines but a growing, and I would argue misplaced, belief that the stabilization of financial markets held out the possibility of a rapid rebound, and the opportunity to rebuild 401(k) accounts and other investments pancaked by last year’s crisis.

After taking out $31.5 billion in March, investors rechanneled funds back into equities, adding approximately $36 billion to stock funds since then, according to AMG Data Services, which tracks mutual fund activity.

This isn’t surprising, as it’s hard to turn your nose up at 32 percent gains in the S&P 500 since it hit rock bottom in early March or the even more impressive 36 percent returns seen in the Merrill Lynch Master II high-yield corporate bond index.

But these returns are being juiced by easy money, which means the picture could look much different when cheap funding is harder to find.


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Moody’s AAA rating is hogwash. As long as unemployment rises consumer spending will drop. Outlooks point to 3 percent world GDP contraction this year. At some point absent alternative energy, crude oil will rise causing further reductions in discretionary consumer spending. We are creating another credit bubble.

Posted by Anubis | Report as abusive

I forgot to mention inflation is just around the corner. Foreign nations are announcing their intentions to divest treasuries as they mature. We will eventually have to pay back trillions of dollars we don’t have. The Fed will be the only lender for the U.S.. As the dollar becomes worth less and less, all the goods we purchase that come from other nations will cost more and more.

Posted by Anubis | Report as abusive

Thankyou Agnes,

Surely the stimulus is at least in the short term reducing the pace and perhaps the depth of the economic decent of this GFC.

However the same stimulus and the extent of the stumulus is obviously going to effect the period at the bottom of the (less deep) trough, and the strength of any recovery.

Surely this trade off is generally understood?

Posted by Tony NSW | Report as abusive

good analysis…..

…..needed more analysis over “noise” vs “news”…


Posted by pronod;India | Report as abusive

Riveting article, Agnes. I really “enjoyed” the imagery. Too bad it’s all too true. Thanks!

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