[B]Weekly Bank Research Center 8-27-07[/B]
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[B] CHF: After the Carry
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[/B] [/B] [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
Our Bias Is for Renewed Weakness. Short-term uncertainty remains substantial in financial markets. However, the recent liquidity injections by Central Banks likely helped keep volatilities upper bounded in the short run at least. In our opinion, this constitutes a potential short-run negative for the CHF. Moreover, implied volatilities are decreasing fast and risk taking is coming back fast as well, as reflected by the rebound in equity markets. While we suspect that volatility may not go back to pre-crisis levels for a while, carry trade attractiveness has risen again.
Full Story
[B] [B][B][B] [B] Sanity Returns to Financial Markets
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[/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
This week saw some sanity return to financial markets. The Dow Jones Industrial Average was up 1.5 percent for the week through mid-day Friday. A few investment grade bond underwritings were also done this week and the Fed stepped up its efforts to restore confidence and liquidity to the financial system. It still appears to be way too early to signal the “all clear” just yet. Spreads on asset-backed commercial paper remain at their widest levels since early 2001 and the spread between conforming mortgages and ten-year Treasury notes remains about a quarter percentage point wider that it did a few weeks ago. Subprime mortgages are still extremely difficult to find and rates on jumbo mortgages remain unusually high relative to Treasuries.
Full Story
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[B] Euroland: Exciting Week Ahead
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[/B] [/B] [I] Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
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The past week has been particularly exciting. When the Federal Reserve cut its discount rate on 17 August and the turmoil in the markets persisted, the markets lost confidence in the ECB hiking at its September meeting. We too downgraded our expectations, seeing little more than a 50% chance of a hike, as opposed to 80% before the Fed.s intervention. Then, when announcing an injection of liquidity into the money market on Wednesday, the ECB chose to add that its monetary policy stance was unchanged from its meeting on 2 August. Back then, Jean-Claude Trichet indicated that there would be a rate increase at the September meeting, and so now we know that the ECB is still inclined towards a September hike. The market has sub-sequently been pricing in a 50% chance of an ECB rate increase in September, while at the time of writing we reckon that there is an 80% chance.
[Full Story](http://danskeresearch.danskebank.com/link/WeeklyFocus24082007/$file/WeeklyFocus.pdf)
[B] [B][B][B] [B] Financial turmoil reflects re-pricing of risk
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[/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
While nobody is ready to declare the credit crunch to be over, some order of semblance returned to global financial markets this week. Equity markets rallied, led by those that suffered the largest losses during the rout, including Japan?s Nikkei (+6.4%), France CAC (+3.2%) and Canada?s S&P TSX (+3%). Comparable declines in the prior week in those markets were 9%, 2% and 3%, respectively. On the fixed income side, investors, who had rushed to the safety of U.S. short-term government bonds last week, reversed some of these flows, so the yield curve flattened substantially. Notably, 3-month U.S. Treasury Bills gained half a percentage point this week, partially offsetting the massive 2 percentage point plunge in the previous 5 trading days.
[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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