One of the themes du jour is the overrated reporting that goes on in the Wall Street Journal (and we’ve waxed eloquent on this subject many times before, as the posts tagged ‘Media Watch” will attest).
While the Journal’s coverage of company news is generally good to very good, it appears that they put their most junior staff on market news, and it shows. Witness today. The Financial Times, in “Investors’ flight from risk picks up pace,” reports that the credit and currency markets were plenty spooked today, with considerable volatility and some new lows on certain indices (full text of the article at the end of this post). One currency trader said that the level of disruption was comparable to February 27-March 4, except for that this time there was a broad selloff of the US dollar. Similarly,
JPMorgan observed that swings in derivatives prices were so extreme they implied “scenarios in which the core of the global liquidity system suffers a serious assault”
I had wondered during the day why Fed and Treasury officials felt compelled to say they saw no systemic risk; now I know why.
However, since the US equity markets rose Tuesday, there was almost no acknowledgment of these developments in the Journal. Its credit markets column focused on delayed LBO financings (Quebecor and First Data) and one that appears to be moving ahead (DaimlerChrysler). Towards the end, it had these comments:
The riskiest, triple-B-minus tranche of the subprime-based derivative index, known as the ABX, fell below 50 cents on the dollar for the first time amid heavy trade, as concerns about subprime-loan contagion deepened. The index traded at 49 cents in late trade, according to Alex Pritchartt, a trader at UBS. On Tuesday, it had hit a low of 50 cents before moving up to 52 cents on the dollar.
“There are people out there who think it’s worth zero,” said Derrick Wulf, portfolio manager at Dwight Asset Management. “There are also people who think it is worth much more.”….
The Treasury-bond market did an about-face, underlining that safe-haven or no, this market isn’t exempt from the current process of debt-market repricing. Selling throughout the session pushed the benchmark 10-year yield decisively back from the 5% level it breached briefly in overnight trade. Soothing comments from Federal Reserve officials on the subprime market turmoil also helped the unwind.
And the “Foreign Exchange” column was hugely misleading. Titled “Dollar Gets Latin America Prop,” out of a ten paragraph story, eight paragraphs were on the prospects for the dollar versus various south of the border currencies. Representative material:
The Colombian and Mexican pesos declined modestly Tuesday when U.S. stocks dropped sharply on fears that the subprime-mortgage sector’s problems were far from over. Many foreign investors remain fearful of the idea of being left with a fistful of peso-denominated assets in the event of a shakedown in financial markets.
But the currencies quickly recovered as investors decided a strong outlook for global growth makes the high-yielding investments worth the risk. The dollar ended in quiet trading at 10.8131 Mexican pesos from 10.8354 late Tuesday, and the greenback fell slightly to 1,961.55 Colombian pesos from 1,963.48.
Some currencies, including the Brazilian real and the Chilean peso, ignored the U.S. subprime worries altogether. The real shot to a seven-year high against the dollar on Tuesday, and again yesterday, finishing at 1.888 to the dollar as foreign investors continued to flood into booming local stock and bond markets.
And this was the extent of the coverage on the currencies that matter:
The euro hit a fresh record high against the dollar for the second straight day amid ongoing concerns about how the subprime-mortgage market’s woes may hurt the overall U.S. economy.
The euro, which had risen to a record high at $1.3787 overnight, was at $1.3755 from $1.3730, while the dollar was at 122.22 Japanese yen compared with 121.97 yen. The euro was at 168.11 yen from 167.46 yen, and sterling was at $2.0335 from $2.0273. The dollar was at 1.2050 Swiss francs from 1.2048 Swiss francs.
The author completely missed the currency volatility, particularly the yen hitting levels that threatened to precipitate a carry trade unwind. This is grossly deficient reporting, yet no one seems to care. It appears that the Journal assumes the pros in these markets all have Bloomberg terminals, and these sections are written for retail investors, But the chumps don’t know they are missing the real story.
Update, 2:00 AM. The UK Times reports that cov-lite deals “have all but evaporated in Europe as banks turn off the credit tap.” Only AAA credits can get them, and corporate AAA credits are rare indeed (to be honest, I don’t know of any).
From the Financial Times:
Investors in European and US credit markets accelerated their flight from risk on Wednesday as the turmoil from the US mortgage markets continued to spill over into other asset classes.
The change in sentiment, which triggered sharp moves in credit derivatives markets, suggested that recent problems in the subprime mortgage sector could be spreading to other corners of the financial world.
Moody’s also said it could downgrade $5bn of complex collateralised debt obligations backed by mortgage securities on Wednesday, affecting 184 mostly low-rated securities. The move followed ratings moves on billions of dollars of mortgage-backed bonds by Moody’s and Standard & Poor’s on Tuesday.
Some analysts said there were signs that investors were reassessing their attitude towards risk-taking in many asset classes.
The iTraxx Crossover index of derivatives on mainly junk-rated debt, a barometer of European corporate credit risk, rose sharply on Wednesday. The cost of insuring €10m worth of this index against default jumped above €300,000 annually before subsiding to about €295,000, up 10 per cent on the day.
The equivalent US index was also hit by credit concerns, rising 21 basis points to 249 bp.
The US dollar at one stage fell to lows against the euro, sterling and yen. The Japanese currency typically strengthens as investors unwind carry trades and back away from risky assets.
Ashraf Laidi, chief currency analyst at CMC Market, said: “The sharp break in the yen carry trade is at its most significant since February 27-March 4, as the yen gains 2 per cent versus the dollar in two days . . . The notable distinction from the events of four months ago is the broad sell-off in the US dollar.”
However, improving US stock markets helped the US currency to recover somewhat. The S&P 500 index closed up 0.6 per cent, with the dollar trading at €1.376 and sterling at $2.033.
Gerard Chaupin, European credit analyst at UBS, said: “Risk aversion is now the most-used word we hear.” He said rating agencies’ downgrades of instruments linked to subprime securities “may have been the straw that broke the camel’s back”.
Robert McAdie, global head of credit strategy at Barclays Capital, said: “Volatility is going to be here to stay for a number of weeks.” However, Wednesday’s rally in US stocks prompted some investors to conclude that the turmoil in the credit markets was unlikely to spread much further.
JPMorgan observed that swings in derivatives prices were so extreme they implied “scenarios in which the core of the global liquidity system suffers a serious assault”. But it stressed “the meltdown in the credit indices seem completely at odds” with trends in the real economy, implying it should be reversed.