Market risk is high

As we get ready for another grueling weak in the markets, one can see that market risk is high. Weekends are always a time of great nerves because there are no trades to validate or question one’s market view. However, this weekend is particularly tense as the U.S. markets have been roiled by renewed credit writedowns and the downgrading of Ambac and MBIA.

Barron’s recently said it saw signs of a recent recovery in credit markets. I commented how I wished they were right in my Thursday entry Signs of recovery in credit markets. But, I am more partial to RBS’ version of events, which I commented on on Wednesday, because any number of markets are showing elevated levels of risk.

  1. High Yield: Spreads on high yield corporates and sovereign debt have widened fairly dramatically of late.

    “Spreads on high-yield bonds widened 14 basis points this week to 653 basis points, according to Merrill’s U.S. High-Yield Master II index. High-yield, or junk-rated, debt is ranked below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.” – Bloomberg News, 20 Jun 2008

  2. TED spread: After declining for a while the TED spred is back up. Friday, it was up another 4 beeps.
  3. LIBOR-OIS is still very, very high. This weekend, I found a good chart that is publicly available on spreads. Check it out here at Bocconi University Professor Francesco Giavazzi‘s website. Notice how LIBOR-OIS gapped up after the credit crunch happened and has not gone back down.
  4. VIX: The VIX was way up to almost 23 last week, as the market was down. Before the mortgage meltdown started with HSBC’s announcement in March 2007, the VIX was hovering at multiyear lows at around the 10-12 mark. Now, the Dow is below its January 2000 high of 11,908.50. That’s a very bad indicator for market direction.

I could go on and on. But, the indicators all show increased volatility, increased risk, and a lot of nervousness as we await Monday.

Lehman started us off on the second leg down on June 9th, much as Bear started the first last June. I am waiting for this leg down to begin in earnest. Let’s see what the markets have in store for us.

Related Articles
U.S. Markets: A Ton of Doubt Calls for Caution, Prieur du Plessis, Seeking Alpha, 22 Jun 2008
RBS issues global stock and credit crash alert, The Telegraph, 18 Jun 2008

Update at 22:25 EDT
Rotten Monday in the works?, Market Watch 22 Jun 2008

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