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Dire Stockmarket warning from Moneyweek
hedger
Posts: 313 Forumite
A sobering article from Moneyweek. God help us.....
"Get ready. The UK stockmarket is gearing up for its next big fall.
We’re not just talking about a few hundred points here. Royal Bank of Scotland’s credit strategy team reckons we could see one of the worst global stock market slides in the last 100 years, with US shares falling 20% by September. That’s bound to hit London stocks hard too.
But why now? Well, the good news – if there is any – is that there’s one key indicator that seems to be a remarkably good predictor of when things are going to get nasty.
All you have to do is to watch the iTraxx Crossover index. I’ll explain what that is in a moment.
But first, let’s have a look at what could be on the way…
Unless you’ve been living in a monastic retreat in the mountains for the past year or so, you’ll probably know the story of the US subprime mortgage meltdown off by heart by now.
A quick recap - US banks gave a pile of mortgage loans to people who were never going to be able to pay them back. They also managed to sell a lot of these loans – and more importantly, credit instruments based on them - to other equally careless banks and investors across the world. The loans went bad from almost the minute they were issued, and the defaults piled up. Total write-offs so far have reached almost $400bn, and are likely to rise higher.
However, it seems that the worst of this particular problem is being put behind us. Uber-investment bank Goldman Sachs has sat down to work some more financial magic on the structured investment vehicles (SIVs) at the heart of the upheaval. We won’t go into this for now, but suffice to say, many commentators think this may start to draw a line under the problem.
But. Sub-prime is far from being the only thing to worry about. There’s another big storm brewing, and this one’s heading for the market for company debt.
In May, the global default rate for "junk" bonds – that’s those that have to pay higher interest rates because they’re seen as more risky than ‘investment grade’ debt – hit a 31-month high of 1.45%, up from 1.29% in April.
The report from Standard & Poor's showed that companies relying on consumption were hardest hit, with 16 of this year’s 33 global defaults coming from consumer-facing sectors such as retail, restaurants, leisure and media.
For now, the situation is worst in the States. That’s no surprise, given that they are further into their slump than anyone else. The US default rate on high-yield debt hit 1.89% in May, up from 1.64% in April, and the highest in more than two years.
It’s going to get a lot worse. The rate is expected to surge to 4.7% within a year. But there’s a 20% chance that it could more than quadruple, to 8.5%, said S&P. That would see "corporate casualties piling up faster than in many years, as economic conditions deteriorate and volatility in the financial markets stays high."
Europe might be behind the US in recession terms, but it’s not going to dodge the bullet either. European consumers are the most pessimistic they’ve been for more than five years. That’s bad news for consumer spending and bad news for companies that rely on it.
How to tell when the market is going to crash
This is all very well. But how can you tell when the real pain is going to kick in and hammer the markets? Well – at the moment at least - the key to timing is to watch the market for credit default swaps (CDS).
These are effectively a type of insurance that investors can buy to protect themselves against the risk of a company missing interest payments on its bonds. So the more expensive a CDS gets, the riskier the market reckons the debt is.
Here’s where the iTraxx Crossover index comes in. It measures the likely default risk of 50 European company bonds, all rated either low risk ("investment grade") or, mostly, in "junk" territory (the name says it all really). And here’s the big secret - since the credit crisis kicked off in earnest, the FTSE 100 (orange line in the chart below) has tracked the iTraxx (the white line) almost perfectly.
(If you cannot see this chart, click here: http://www.agoralifestyles.com/content/files/20junechart.gif)
It’s rare to get a decent market indicator like this. And we could really need it in the near future. "The very nasty period is soon to be upon us — be prepared", says Bob Janjuah, credit strategist at Royal Bank of Scotland, in a report uncovered by The Telegraph’s Ambrose Evans-Pritchard. "The worst of the stock and credit market declines that began last year is yet to come".
The RBS strategists reckon that debt default costs are about to soar as "all the chickens come home to roost" from the excesses of the global boom. Basically, with central bankers’ hands tied by inflation, the world is facing hard times. Company earnings forecasts are going to be slashed, and that’ll send the iTraxx Crossover from its current level of around 500 to a record 700.
And if that happens, UK share prices will take a hammering. A similar fall to that predicted for the S&P 500 would take the FTSE 100 to around the 4,500 mark by autumn. The RBS team aren’t the only ones worried.
Morgan Stanley’s European banking team warned last week of a "catastrophic event on the horizon which could match the European monetary crisis of the early 1990s". And their colleagues in the global strategy team reckon that the bear market rally is well and truly over, and that a "superbearish scenario featuring a prolonged period of stagflation can’t be ruled out".
This might seem extreme. But don’t forget that, despite all the bad news we’ve seen since the start of the credit crunch, London shares are down by less than 15% from a year ago. My guess is that we now could be looking at a fall in the FTSE 100 of at least another 15% over the summer. So, keep watching the iTraxx like a hawk. I’ll leave the final word to Mr Janjuah: "Cash is the key safe haven. This is about not losing your money, and not losing your job."
"Get ready. The UK stockmarket is gearing up for its next big fall.
We’re not just talking about a few hundred points here. Royal Bank of Scotland’s credit strategy team reckons we could see one of the worst global stock market slides in the last 100 years, with US shares falling 20% by September. That’s bound to hit London stocks hard too.
But why now? Well, the good news – if there is any – is that there’s one key indicator that seems to be a remarkably good predictor of when things are going to get nasty.
All you have to do is to watch the iTraxx Crossover index. I’ll explain what that is in a moment.
But first, let’s have a look at what could be on the way…
Unless you’ve been living in a monastic retreat in the mountains for the past year or so, you’ll probably know the story of the US subprime mortgage meltdown off by heart by now.
A quick recap - US banks gave a pile of mortgage loans to people who were never going to be able to pay them back. They also managed to sell a lot of these loans – and more importantly, credit instruments based on them - to other equally careless banks and investors across the world. The loans went bad from almost the minute they were issued, and the defaults piled up. Total write-offs so far have reached almost $400bn, and are likely to rise higher.
However, it seems that the worst of this particular problem is being put behind us. Uber-investment bank Goldman Sachs has sat down to work some more financial magic on the structured investment vehicles (SIVs) at the heart of the upheaval. We won’t go into this for now, but suffice to say, many commentators think this may start to draw a line under the problem.
But. Sub-prime is far from being the only thing to worry about. There’s another big storm brewing, and this one’s heading for the market for company debt.
In May, the global default rate for "junk" bonds – that’s those that have to pay higher interest rates because they’re seen as more risky than ‘investment grade’ debt – hit a 31-month high of 1.45%, up from 1.29% in April.
The report from Standard & Poor's showed that companies relying on consumption were hardest hit, with 16 of this year’s 33 global defaults coming from consumer-facing sectors such as retail, restaurants, leisure and media.
For now, the situation is worst in the States. That’s no surprise, given that they are further into their slump than anyone else. The US default rate on high-yield debt hit 1.89% in May, up from 1.64% in April, and the highest in more than two years.
It’s going to get a lot worse. The rate is expected to surge to 4.7% within a year. But there’s a 20% chance that it could more than quadruple, to 8.5%, said S&P. That would see "corporate casualties piling up faster than in many years, as economic conditions deteriorate and volatility in the financial markets stays high."
Europe might be behind the US in recession terms, but it’s not going to dodge the bullet either. European consumers are the most pessimistic they’ve been for more than five years. That’s bad news for consumer spending and bad news for companies that rely on it.
How to tell when the market is going to crash
This is all very well. But how can you tell when the real pain is going to kick in and hammer the markets? Well – at the moment at least - the key to timing is to watch the market for credit default swaps (CDS).
These are effectively a type of insurance that investors can buy to protect themselves against the risk of a company missing interest payments on its bonds. So the more expensive a CDS gets, the riskier the market reckons the debt is.
Here’s where the iTraxx Crossover index comes in. It measures the likely default risk of 50 European company bonds, all rated either low risk ("investment grade") or, mostly, in "junk" territory (the name says it all really). And here’s the big secret - since the credit crisis kicked off in earnest, the FTSE 100 (orange line in the chart below) has tracked the iTraxx (the white line) almost perfectly.
(If you cannot see this chart, click here: http://www.agoralifestyles.com/content/files/20junechart.gif)
It’s rare to get a decent market indicator like this. And we could really need it in the near future. "The very nasty period is soon to be upon us — be prepared", says Bob Janjuah, credit strategist at Royal Bank of Scotland, in a report uncovered by The Telegraph’s Ambrose Evans-Pritchard. "The worst of the stock and credit market declines that began last year is yet to come".
The RBS strategists reckon that debt default costs are about to soar as "all the chickens come home to roost" from the excesses of the global boom. Basically, with central bankers’ hands tied by inflation, the world is facing hard times. Company earnings forecasts are going to be slashed, and that’ll send the iTraxx Crossover from its current level of around 500 to a record 700.
And if that happens, UK share prices will take a hammering. A similar fall to that predicted for the S&P 500 would take the FTSE 100 to around the 4,500 mark by autumn. The RBS team aren’t the only ones worried.
Morgan Stanley’s European banking team warned last week of a "catastrophic event on the horizon which could match the European monetary crisis of the early 1990s". And their colleagues in the global strategy team reckon that the bear market rally is well and truly over, and that a "superbearish scenario featuring a prolonged period of stagflation can’t be ruled out".
This might seem extreme. But don’t forget that, despite all the bad news we’ve seen since the start of the credit crunch, London shares are down by less than 15% from a year ago. My guess is that we now could be looking at a fall in the FTSE 100 of at least another 15% over the summer. So, keep watching the iTraxx like a hawk. I’ll leave the final word to Mr Janjuah: "Cash is the key safe haven. This is about not losing your money, and not losing your job."
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Comments
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Just think of it as a buying opportunity. :rolleyes:0
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Hardly a buying opportunity when most of my dosh is in there now....
Well given your choice of nick I'm sure you are adequately coverd
Hope for the best.....Plan for the worst!
"Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown0 -
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nice article: let's hope it comes to fruition BLOODBATH IN THE EVENING THEN? :shocked: OR PERHAPS THE AFTERNOON? OR THE MORNING? OH, FORGET THIS MALARKEY!
THE KILLERS :cool:
THE PUNISHER :dance: MATURE CHEDDAR ADDICT:cool:0 -
I liked the comment made on the Telegraph web site about Mr Janjuah's past record, that he'd predicted 7 of the last 4 crashes, or something like that.Debbie0
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'7 of the last 4' ????!!! is that good or bad? 0
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hi all,
when the ftse went over 6000 last time I decided to sell ALL my UK-held stock. I'm beginning to feel a bit smug. Sorry.:rotfl:
The unwrapped funds were merely liquidated and Ive put them all in accounts. But I still have a lot in the form of "wrapped cash"... i.e. liquid sums held with Selftrade and Hargreaves Lansdown which can be reinvested as ISA funds.
At the moment these funds are probably making 2%. I should reinvest them... but in what? I put an initial amount into gilts... very boring... hardly any more than 2%... anyone got any views?
Thanks0 -
well mrodent, that's the trouble with trying to time the market. of course, if you sold at 6,000, then you missed a fair bit of gains as it was over 6300 for a short time. i got burned a couple of times trying to time the market over the past 18 months before i realised it was impossible in such a volatile market scenario. my solution: drip feed investments in constantly, and especially in a downturn. it's the only way to sleep at night. these days i feel good if the market rises and i tell myself i'm buying cheap when it falls.
of course, this only really applies if you're a long-term investor. if i needed my money in the next 12 months, i'd be nervous.0
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