Credit conditions seemed to improve over the past week as a clear rebound in risk appetite has encouraged borrowers and lenders to bridge the gap the wide spreads that have developed. However, the credit market’s correlation to broader financial trends may break down rather quickly over the coming week considering the forces working against it. On Tuesday, the Fed released the results of its sixth injection of liquidity into the unstable money market under its Term Auction Facility program. The $30 billion in funds available to commercial banks received total bids of $67.96 billion, suggesting the demand for credit still hangs heavy over the market. What’s more, Fed Chairman Bernanke’s testimony before the Senate highlighted the policy group’s expectations for worsening financial and economic conditions.
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[B] Improving outlook[/B] means the Federal Reserve could use this indicator to
support a rate hike. The opposite stands for a deteriorating outlook.
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CREDIT MARKET: HOW IS IT DOING?[/B]
[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
The risk premium in the debt market has retraced markedly over the past week. The cost of insuring companies’ solvency through credit default swaps fell as news that the market’s largest bond insurers would not have their credit ratings slashed hit. A number of banks will reportedly inject Ambac with liquidity while the S&P group reportedly took MBIA off its credit watch list.
Money market assets eased off their sharp plunge, but yields have yet to put in for a notable advance that may signal an end to the selloff is nigh. What’s more, with Bernanke’s testimony before the Senate focusing on a dour outlook for the economy and comments clearly keeping the door open to further rate cuts, yields across the curve will likely have further to fall.
[B]STOCK MARKET: HOW IS IT DOING?[/B]
[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
While the broad equity market has advanced over the past week, certain sectors were advancing with more zeal than others. In a clear contradiction of economics, the retail and real estate groups marked outsized rallies over 3 percent apiece – despite indicators that reported a 13-year low in new home sales and the most pessimistic consumer confidence reading in five years. At the same time, the financial index lagged in its advance even though the security of the largest bond insurers held the greatest promise for lending institutions and banks.
The advance within the battered financial sector has been uneven. News that MBIA and Ambac would not have their top credit ratings slashed offered a much needed boost of confidence for commercial lenders and investment houses; but the constant threat of volatility in the financial markets proved too ominous for investors to confidently back the market’s turn of faith. Now, with earnings season and a fresh round of writedowns not set to begin until April, the financial sector will likely follow credit conditions and data for the coming week.
[B]U.S. CONSUMER: HOW ARE THEY DOING?[/B]
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[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
Walmart shares continue to outperform broader equity markets, and the discount retail conglomerate has just recently set fresh 16-month highs on a broader equity market rally. Previously bullish earnings data suggests that the discount retailer may be able to withstand bearish momentum for the retail sector. Home improvement company Home Depot has not been nearly as fortunate, and persistent pessimism on domestic housing trends may potentially force further losses in the company’s shares. Seen through relevant stock indices, markets remain bearish on prospects for the domestic consumer.