With price action getting downright nasty, thought we might try to put it into the context of recent history.
When Lehman’s officially waved the flag on 15 September 2008, with the market already well below its highs, it was the catalyst for the wholesale dumping of stock – whether it was leveraged equities or otherwise. We can see that volumes remained elevated from that time until after the market had finally bottomed.
Our risk appetite index peaked on 20 October 2008 and thereafter returned to more relaxed levels even as the equities markets continued to fall. This was simply a function of risk pricing (credit spreads and equities implied volatility) starting to contract from the crisis levels of mid-October. Remember that when the equities market bottomed on 6 March 2009, the VIX closed at 49.33 (currently 45.79) and the Aaa-Baa spread was 280 bps (currently 113 bps).
So what can we extrapolate from this?
1) I have the selloff starting from the time that Goldman’s was indicted. Up until that then financials had been viewed as untouchable. While pinning the sell-off on a single event is just silly – I think that this action by the US government is indicative of the forced march of government’s globally into the private sector. This trend should lead to an increase in risk premiums.
2) I’m marking the acceleration event as being the failure of the Greek rescue package. From the moment it was announced, the EUR has been pummeled relentlessly, the carry trade began its descent into chaos and commodities have nose-dived. Risk spreads have pushed out very quickly from the placidity that prevailed in April – but are not yet comparable to those that prevailed in the furnace of Sep/Oct 2008.
3) While we may not have a replay of the volumes that prevailed during late 2008/early 2009 – as leverage has been taken out of the equities markets – it’d be fair to assume that we have not seen the sustained selling that would signal the panic is upon us.
4) Time should be on the side of buyers of equities. When sentiment turns this radically in such a small space of time, we can expect the aftershocks to ripple through asset prices for some time. Watch for government actions to manage markets. While it took 6 months from the time the Fed started its QE program for the market to bottom last time, think we have a better idea of how this mechanism might work.
5) The real worry for the Australian market is China. It’s sharemarket has been trading lower for longer (see here). A loss of confidence on this front would see the unravelling of the commodity longs that dominate the global demand and supply balance. If you are long Australian commodity producers, you must be expecting the Chinese government to stump up with another $500 bn – and soon.
1) I have the selloff starting from the time that Goldman’s was indicted. Up until that then financials had been viewed as untouchable. While pinning the sell-off on a single event is just silly – I think that this action by the US government is indicative of the forced march of government’s globally into the private sector. This trend should lead to an increase in risk premiums.
2) I’m marking the acceleration event as being the failure of the Greek rescue package. From the moment it was announced, the EUR has been pummeled relentlessly, the carry trade began its descent into chaos and commodities have nose-dived. Risk spreads have pushed out very quickly from the placidity that prevailed in April – but are not yet comparable to those that prevailed in the furnace of Sep/Oct 2008.
3) While we may not have a replay of the volumes that prevailed during late 2008/early 2009 – as leverage has been taken out of the equities markets – it’d be fair to assume that we have not seen the sustained selling that would signal the panic is upon us.
4) Time should be on the side of buyers of equities. When sentiment turns this radically in such a small space of time, we can expect the aftershocks to ripple through asset prices for some time. Watch for government actions to manage markets. While it took 6 months from the time the Fed started its QE program for the market to bottom last time, think we have a better idea of how this mechanism might work.
5) The real worry for the Australian market is China. It’s sharemarket has been trading lower for longer (see here). A loss of confidence on this front would see the unravelling of the commodity longs that dominate the global demand and supply balance. If you are long Australian commodity producers, you must be expecting the Chinese government to stump up with another $500 bn – and soon.
