Investors' flight from risk picks up pace
Saturday, 28 July 2007
Paul J Davies and Gillian Tett
Investors in European and US credit markets accelerated their flight from risk last 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.
(Reporting by Paul J Davies and Gillian Tett in London and Richard Beales and Saskia Scholtes in New York)
Investors in European and US credit markets accelerated their flight from risk last 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.
(Reporting by Paul J Davies and Gillian Tett in London and Richard Beales and Saskia Scholtes in New York)