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Ft: Fragile Markets Risk Relapse

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Thing is, as long as nobody know who's holding the toxic waste then nobody is willing to open their reactor. Meanwhile the fed sails the $ into the sunset in a pathetic attempt to keep the sagging asset balloon from popping. TBH, there are far too many nails to stop it: sub-prime resets, continuing toxicity, housing meltdown and so on. The US is going into recession, we will follow in 08 on the back of our own sub-prime meltdown. The resets in q1 08 will be the really interesting one to watch.....

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http://www.ft.com/cms/s/0/73c4b3bc-6e1a-11...00779fd2ac.html

Fragile markets risk relapse

By Krishna Guha and Michael Mackenzie in New York

Published: September 29 2007 01:53 | Last updated: September 29 2007 01:53

Markets and the world economy are in a no-man’s-land 11 days after the US Federal Reserve’s dramatic half-point interest rate cut.

The liquidity squeeze in credit markets has eased a little, as Robert Steel, the US Treasury under-secretary, said this week.

But conditions in the interbank money market and other troubled corners of the financial system remain far from normal.

Now comes a nerve-racking wait to discover whether the credit squeeze has pushed the US economy on to a sharply weaker growth path that could end in a recession in spite of the Fed’s efforts on rates.

If the US economy does deteriorate severely from here, sickly credit markets would have to absorb another shock: this time from rising expected defaults on a wide range of US assets. That could put the market healing process into reverse.

Even before Friday’s distress sale of Net Bank, a US internet bank, Fed officials were wary of assuming that the crisis is past.

Fed policymakers do see a welcome change in tone and sentiment since their rate cut, with investors starting to differentiate much more between assets and investment vehicles.

The effects of this have been most marked in the asset-backed commercial paper market (ABCP), where stress is now more tightly confined to paper backed by problem mortgages and ­special investment vehicles (SIVs) that are not backed by strong banks. Credit spreads have also narrowed.

The market for leveraged buy-outs is starting to re-open and spreads between agency conforming and non-conforming mortgages have tightened a little.

But Fed officials still believe markets are fragile. They are a little concerned by the slow progress in the non-conforming mortgage market.

While interbank lending spreads as well as rates fell in the aftermath of the rate cut – much to the relief of Fed policymakers – spreads have moved up again.

“There is still a clear dislocation in money markets and the new high in Euribor is a genuine worry,” said Dominic Konstam, head of interest rate strategy at Credit Suisse. “Volumes in the market are running at 10 per cent of normal activity.”

Officials blame the latest uptick in interbank spreads on quarter-end and year-end husbanding of liquidity. They see that big banks are still hoarding cash owing to uncertainty about how many assets currently held in investment vehicles will come back on balance sheet.

With mostly smaller and weaker banks seeking to borrow, interbank lending rates have been pushed up by so-called “adverse selection”.

Policymakers do not expect markets to recover rapidly, in part because of the overhang of securities. Weak SIVs unable to obtain financing may have to liquidate their portfolios, while banks still have a huge portfolio of leveraged loans to distribute.

Most investors still lack valuation models capable of evaluating the most complex credit products.

The Fed rate cut “does not cure the ills of the liquidity crisis”, said Jim Caron, co-head of global interest rate strategy at Morgan Stanley. Many institutions have had to rely on shorter-term funding in recent weeks, making them vulnerable to bad news.

Fed policymakers lean to the view that every day of relative stability takes the markets closer to recovery.

That said, they believe renewed turmoil is possible even without a bad macro-economic shock – if, for instance, another second-tier financial institution like Northern Rock, a large SIV or money market mutual fund gets in trouble.

If the economy – above all the job market – takes a serious turn for the worse, the risk of fresh turmoil would increase substantially.

The macroeconomic data are still cloudy, with weak figures on housing, soft durable goods orders and lower confidence set against yesterday’s resilient consumer spending report.

It is possible for improvement in market functioning to co-exist with increasing concern about the economy – but not for long. Either the economic data will point upwards, in which case the market healing process should speed up, or they will point downwards and then markets are likely to take another turn for the worse.

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The macroeconomic data are still cloudy, with weak figures on housing, soft durable goods orders and lower confidence set against yesterday’s resilient consumer spending report.

It is possible for improvement in market functioning to co-exist with increasing concern about the economy – but not for long. Either the economic data will point upwards, in which case the market healing process should speed up, or they will point downwards and then markets are likely to take another turn for the worse.

So true.

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We haven't really got into the woods yet I suspect!

As someone once said:

We haven't even finished the national anthem yet for an event that's likely to go into extra time.

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As someone once said:

We haven't even finished the national anthem yet for an event that's likely to go into extra time.

I don't think they said it as the continuation of a woods analogy though.

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We are not out of the woods.

We have just got out the car and we are now walking down the path towards the woods. Once we are in the woods everyone will know it.

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Guest Shedfish
“Volumes in the market are running at 10 per cent of normal activity.”

less of a credit crunch, more of a spending splat

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Guest DissipatedYouthIsValuable
We have just got out the car and we are now walking down the path towards the woods. Once we are in the woods everyone will know it.

We are just being led by a very bad goblin over the fields to the woods.

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less of a credit crunch, more of a spending splat

Nice Avatar shedfish.

Has anyone else noticed that mervyn king looks suspiciously like penfold from the dangermouse cartoons??

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