Mother of all carry trades faces an inevitable bust

By Nouriel Roubini

Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher. Read More...

Tags: Risk Appetite

Hello Traders

Please click on the Deutsche Bank Analysis link below for an excellent overview of the current and potential condition of real estate in the USA. This shifting crustal plate may be the root of of our next major repricing in fx trends. As witnessed in 2007, this asset class has the finger on the trigger of risk in the coming months.
http://www.scribd.com/doc/18206788/DB-Securitization-Reports-Drowning-in-Debt-A-Look-at-Underwater-Homeowners

FX Overnight

The G20 communique released over the weekend did not mention currencies, and the rest of its contents supported more appetite for risk.

The lack of FX talk may lead to disappointments amongst some participants, especially from the Eurozone. It is very likely that major emerging market economies asked for the exclusion but the issue is sure to re-emerge in different forums. Read More...

Tags: Risk Appetite

The markets gradually resumed normal service after yesterday's holidays in the UK and US. With market moving data in short supply, the market is focused on the week's heavy UST supply schedule, which is set to begin today with a US$40bln 2y note auction. With concerns over the US' credit rating dominating proceedings over the past week, the prospect of a rising risk premium on US paper is weighing heavily over the greenback and contributed to last week's selloff.
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Tags: Risk Appetite

The labour market remains weak though our economists note that yesterday's claims data were boosted by the temporary shutdown of a major automaker and the Labor Department refrained from providing details of the impact from the shutdown and instead said a "good part" of the latest jump was auto-related. Although labour figures are often lagging in nature, the decline in net wealth and consequent consumer deleveraging will restrain growth globally. Read More...

Tags: Risk Appetite

The USD has weakened on risk appetite. The commodity currencies, in particular, have markedly strengthened against the dollar while investor risk-seeking has interestingly enough benefited the dollar against the euro, judging from the breakdown in the correlation between EURUSD and global equities. But investor uncertainty still persists, particularly as we enter first quarter earnings season and wait for the pending results of the bank stress tests. Any negative developments on those fronts would shift sentiment back to safe havens like the dollar. We remain cautious as there is a good deal of event risk, mostly in the financials, but we still favour the dollar over the longer term at the current juncture.
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Tags: Risk Appetite

The improvement in risk appetite is due to a number of factors. Namely, the stabilisation in PMIs in the Eurozone, coupled with this week's improvement in manufacturing ISM (both data sets for January) must be removing some fears of further massive downside risks. Also, various stimulus packages have been announced, with Australia revealing a second stimulus package yesterday and the BoJ announcing it will purchase stocks held by Japanese banks. Indeed, this morning, Australian retail sales for December rose a staggering 3.8% m/m, fuelled by cash handouts from government. There is the thought that this demonstrates that government policy can be effective in preventing a downward spiral in aggregate demand, at least for the short term. But you know me, i'm not convinced throwing cash at the problem is going to demean the overall force of the down move. In US data released overnight, pending home sales for December rose by 6.3% m/m and above market expectations of a flat result as home affordability rose. On a more negative note, vehicle sales for January plunged, and aggregate US car sales are now below China for the first time. Read More...

Tags: Risk Appetite

Nobel Prize - winning economists and "genius'" Myron Scholes and Robert C. Merton were founders of Long Term Capital Management, which in 1998 lost $4 billion. That helped foster a global financial crisis and triggered both a Wall Street-led bailout and congressional hearings on the dangers of hedge funds, the freewheeling pools for wealthy investors and institutions that often trade heavily and rely on borrowed money to achieve jacked up returns. LTCM had leveraged a notional amount of $2.5B into excess of $100B of investment. NOW THAT'S GENIUS!
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Tags: Risk Appetite

The market remains hesitant to commit to risk while awaiting US data. Read More...

Tags: Carry Trade, Risk Appetite