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ozymandius Donating Member (1000+ posts) Send PM | Profile | Ignore Thu May-07-09 04:51 AM
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1. Market Observation
What are the Credit Markets Telling Us?
by Chris Puplava

Over the course of the past two months we have witnessed some stabilization in the financial markets as stocks have staged a strong rally and credit spreads have come down. While we have seen stabilization in the financial markets since the March lows the stabilization process actually began after the October 2008 panic lows. After the collapse of Lehman the markets came unglued and the Federal Reserve and Treasury worked over time creating lending facility after lending facility to ease the various sectors of the financial markets, and looking back, one would have to conclude they have largely been successful. But the question that lies ahead of us is whether or not their financial efforts will gain economic traction. Basically, do the recent green shoots have roots?


One of the areas that I have been monitoring closely over the last several months in terms of gauging the anxiety of the markets as well as the force of deleveraging is the currency markets. The collapse of Lehman led to the unwinding of the yen carry trade in which cheaply borrowed yen was used to invest in higher yielding currencies. As the deleveraging process gained force the euro gave back in two months what it had gained in six years in terms of purchasing power relative to the yen. While the weakening of the euro relative to the yen was an early warning heading into the market collapse late last year, the stabilization and strength in the euro relative to the yen this year was an early warning of a coming market advance. As a break below the 200 day moving average (200d MA) was a warning of market stress, a break above the 200d MA is likely indicating greater stabilization in the currency markets and signs of easing in investors fears.


It appears the easing of investors fears has been justified given the easing in the credit markets. For example, the Feds Senior Loan Officer Opinion Survey for April hit the street on Monday and showed that the peak in tightening in the credit markets is probably behind us. The center of the current crisis has been housing, and the Feds survey shows that the net percentage of banks tightening standards for mortgage loans decreased significantly in the first quarter of the year with a slight uptick in the recent quarter, though still well below the wide tightening seen at the end of 2008. Accompanied with the easing in lending standards has been a rising trend in mortgage demand as the net percentage of banks reporting stronger demand has improved and actually turned positive for prime mortgages in the second quarter.
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