reviewing the turmoil: not as bad as it felt
http://www.ft.com/cms/s/1/0a27fcb4-5986-11dc-aef5-0000779fd2ac.html
Markets in August Published: September 2 2007 19:56 | Last updated: September 2 2007 20:15
Just how nasty was August in the end? Equity investors lucky enough
to be returning from a long holiday on Monday will wonder what all
the fuss was about. In spite of some stock markets moving around by
up to 4 per cent in a day, declines for the month were ultimately
tame. Most bourses in Asia fell between 1 and 3 per cent in local
currency terms. European equities were pretty much flat. The Dow
Jones finished August higher, while Chinese punters, still on planet
Zog, pushed Shanghai’s index up 17 per cent.
With the exception of the yen, even currencies finished the month
close to where they began. All the action was confined to the carry
trade, with the unwinding of short positions pushing the yen higher
across the board. Traders on the wrong side of the yen versus high-
yielding currencies will be particularly sore – during August, for
example, Japan’s currency jumped 10 per cent against the New Zealand
dollar.
The story is more mixed for fixed income. A flight to cash meant that
yields dropped the most at the short end of the curve. Yields on 10-
year securities fell only 10 to 20 basis points in the US, UK and
Europe. But three-month Treasury yields plummeted almost 200 basis
points on a single day, a fortnight ago, and are now 60 basis points
lower than at the beginning of August. In spite of the best efforts
of central bankers, overnight interbank rates in the US and UK remain
30-50 basis points above base rates.
This illusion of calm is partly because the pain caused in August is
being felt in the non-traded corners of the financial system. Only
when hedge funds publish their performance, or if banks issue
earnings downgrades, will blood start seeping under the door. Nor
should investors concentrate too narrowly on credit troubles. August
had enough worrying macroeconomic data to stress even the most rested
soul.