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Aug 08

Market Panic…dodgy thoughts

Many many retail investors are panicking, withdrawing their funds and shifting into lower risk investments (mostly cash). Advisers and head office staff are looking for communications to calm investors down but unfortunately the current market situation is that there isn’t necessarily a right answer.

Whilst I don’t believe the S&P downgrade of US debt is anything to be overly concerned about, the European situation needs to play out a lot more before any confidence can be regained.

The US debt downgrade is bound to trigger some mandated withdrawals whereby many funds, which are expected to hold a certain proportion of AAA rated debt, will possibly start buying other AAA rated sovereigns such as Australian or German debt. So far this morning this hasn’t been the case as Australian bond yields have actually increased a little bit (although its hard to tell given Bloomberg appears to have a few errors). As for equity markets, I believe they have already factored in much of the downgrade as the political behaviour seen in the US over the past couple of weeks made a downgrade a little obvious. Anyway, I guess we’ll find out tonight.

I believe Europe continues to be the issue becuase if markets continue to bid up bond yields in Spain and Italy then this will ultimately make it very difficult for each country to continue paying its debts and given these two countries are far “too big to fail” then there is bound to be another Lehman Brothers type scenario if things don’t settle down. So given this risk, I’m not surprised that investors are de-risking (their challenge will be when to get back in…which they are bound to stuff up) and perhaps they should.

Anyway, I’m sure the next steps will be both the European Central Bank and Federal Reserve Bank of New York will be substantial debt purchase programs in order to keep yields low and provide some cheap cash to settle markets again. This is no guarantee of a bounce back and I’ve said many many times before the sovereign crises has many more months to go and there will be further shocks and with the demise of the Euro increasingly on the cards the ultimate market impacts are quite unknown.

Time will tell.

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