[B]Weekly Bank Research Center 8-6-07[/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]
In this note, I make two points. First, there is a systematic relationship between G10 exchange rates and the overall level of risk appetite - a relationship solid enough, in my view, to be used as a trading rule. Second, I believe that there is a good chance that global risk appetite will recover sooner rather than later. In fact, we may be establishing the trough of this latest sell-off in good-quality risky assets. If I am right, then USD/JPY, EUR/USD, GBP/USD, EUR/JPY, AUD/USD and NZD/USD should all head higher again, reversing a significant portion of the corrections we?ve seen in the past two weeks.
Full Story
[B] [B][B][B] [B] Irrational Pessimism
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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
The current decade continues to reflect the mirror opposite of the 1990s, with irrational pessimism replacing the exuberance we were all worried about 10 years ago. The unwinding of the housing boom and collapse of the subprime market has fueled a growing aversion to risk. Despite these trends, a full blown credit crunch seems unlikely. U.S. and global economic growth should remain close to its long-run sustainable trend or just slightly below it. This will keep central bankers on inflation watch but should also keep short-term interest rates close to their current levels. Credit quality, outside of subprime and investor-laden Atl-A loans, still remains exceptionally strong, with delinquency rates and defaults well below historical norms.
Full Story
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[B] Fear of Credit Crunch in Risk Assets
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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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Whenever a market professional has problems under-standing and not the least explaining to clients what is going on, "liquidity-driven" is often used as a fallback phrase. This time, however, there is in our view more fundamental truth in the expression than usual. Global central banks and commercial banks are now joining forces to remove "cheap money" from households and companies. While central banks have been raising in-terest rates since 2004, commercial banks have only recently started to tighten credit conditions. Following a period in which the global financial system experi-enced no loan losses and hence eased credit stan-dards, tighter central bank credit conditions are now claiming their first victims - among them US sub-prime borrowers. In general, tighter liquidity standards will help normalise the performance of both risk assets and the global economy after the "boom" of recent years.
[Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus03082007/$file/WeeklyFocus.pdf)
[B] [B][B][B] [B] Focus on BoE Inflation Report and US FOMC interest rate decision
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[/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
The BoE quarterly Inflation Report will take centre stage in the UK on Wednesday as markets look for fresh guidance on the Bank’s projections for economic growth and inflation. The Report follows the MPC decision to keep interest rates on hold at 5.75% last week, and will provide an update on the Bank’s latest forecasts for economic growth and inflation over the next two years, based on the path implied by various interest rates. Solid economic data from the manufacturing and services industries last week suggest economic growth is holding up above trend in the present quarter, but this has to be balanced by tentative signs that consumer spending growth has started to slow. Capacity constraints, the 15% increase in oil prices since the May Inflation Report and upside pressure on food prices mean that the Bank is likely to stick to its view that inflation risks continue to be weighted to the upside in the medium term. Indications from recent upbeat PMI surveys suggest manufacturing activity may have expanded for a 4th consecutive month in June as industry reaps the benefits from strong demand and new orders, despite a strong pound. The British Retail Consortium (BRC) will publish its retail sales monitor for July on Tuesday and will be scrutinised for the latest turnover figures on the high street. Global trade figures for June are due on Thursday and may show a small widening in the global trade deficit to £6.6bn in June from £6.3bn in May.
[B] [B][B][B] [B] Volatility Back With a Vengeance
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
Amid a wave of bearish news that served as focal points, mostly emanating from souring loans related to the U.S. subprime mortgage market, financial markets reappraised risk and reshuffled assets in a big way. Perception of risk, as measured by various volatility indices, has shot up. The normal outcomes have all been exhibited: steeper yield curves, equity sell offs and increased credit spreads across the entire spectrum of debentures. This is a good time as any to reassess what the economic fundamentals point to. Canadian real GDP grew by 0.3% in May, supported by a still booming service sector. Second quarter real GDP growth is expected to push the Canadian economy into a position of excess demand. Inflation remains the main concern and the Bank of Canada will likely remain in tightening mode as long as core inflation doesn?t show any clear downward momentum.
[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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