Credit Problems Continue to Plague Markets, More Trouble Ahead

[B]Weekly Bank Research Center 8-14-07[/B]


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[B] Anticipating an Early Recovery in Risk-Taking
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]

Recent movements in the currency markets mostly reflect changes in risk-appetite, not economic fundamentals. The global economy remains extraordinarily robust. While many draw the distinction between now and 1998, one of the biggest differences now is how robust the rest of the world is - the US is no longer as dominant an economy as it was in 1998. When the subprime dust settles, I believe the next trade will be to unwind all of the FX movements we have seen recently: EUR/USD, USD/JPY, AUD/USD should all head back higher. Moving beyond this risk-driven move, I see the USD gradually reasserting itself in the second half of the year. By the end of 2007 I expect to see the EUR/USD and USD/JPY crosses lower, and AUD/USD higher.
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                         [B] [B][B][B] [B]  A Farewell To Subprime ARMS  

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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]

Turbulence in credit markets which we have been writing about for the past few weeks, took a new turn this week. The catalyst was news that BNP Paribas, the largest bank in France, was suspending withdrawals from three funds with exposure to the U.S. subprime mortgage market. This news sparked fears that investors would seek redemptions from other funds, leading to a huge demand for cash. Indeed, LIBOR rates spiked higher as banks scrambled to raise cash (see graph at left). In response, the European Central Bank took the rare step on Thursday of providing €95 billion in special lending to banks to ease a liquidity crunch in the money market, which exceeded the amount it injected after September 11, 2001, and it returned to the market with €61 billion more on Friday.
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                                          [B]                                                                                                                                                                          Still Troubled Waters Ahead                                                                                                                                                                                  

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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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                                                                                                                                                                                                                                                   Financial markets have again sailed into the kind of stormy waters that have  whipped up a couple of times in the past few years. We have written extensively  on the recent credit market jitters, but as always it is im-possible to say how  much the market will move when a wave of uncertainty rolls in. The storm has its  own in-ner logic. Increasing volatility mean that the alarm bells on market  makers. risk models begin to ring, forcing them to reduce their positions.  Losses on positions force some market participants to liquidate them. Un-certainty causes all  participants to be more cautious and to demand higher expected returns before  assuming a risk.                                                                                                                                                                                                        

                                                                                                                                                                              
                                                                                                                                                                                                                       [Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus10082007/$file/WeeklyFocus.pdf)
                                                                     
                                           
                                                                                                                                                                                                                                                                                                                                                                            [B] [B][B][B] [B]  Financial Confidence Shaken, Central Banks Respond  

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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
It has now been two full weeks since the initial bout of financial market turmoil began. Prior to the Federal Reserve meeting this past Tuesday, there was increasing speculation that Fed officials were at their stables in the Hamptons readying the white horses for a ride to the rescue. For example, as of Tuesday morning before the Fed?s announcement, the market for interest rate futures had priced in a 50% chance of three cuts by the Federal Reserve by year-end - with only four meetings left. Instead, what financial markets got was no immediate cut by the Fed, no signal of impending cuts, and a statement that remained steadfast with past communications that - in spite of recent volatile financial markets and some credit worries - the prospects for economic activity remain relatively unchanged. By the end of the week, however, central banks were injecting liquidity into markets - operations they have not used since the financial fallout following 9/11 and the collapse of a prominent hedge fund in 1998. So what are the problems? What are not the problems - at least at this point? And, most importantly, what does this all mean?

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             [B] [B][B][B] [B]  Other Pre-screened Independent Contributors[/B]

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[/B] [/B] [I] J-Chart [/I]
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