A subprime contagion waiting to happen

Markets were once again jolted this week as the sub prime related losses were compounded by the rating agencies decision to downgrade securities backed by this rapidly disintegrating segment of the housing market. The move, albeit a bit late, did send a strong message to the investment community that the size and duration of losses may have been (surprise, surprise) underestimated. This will evidently exacerbate the problem as it means higher lending rates and tighter rules to an already fragile base. The growing risk of contagion triggered a two day stock market sell off, raised treasury bond prices, widened credit spreads across the board and pushed the dollar lower versus other major currencies. Bears clearly had the upper hand over the week, reviving bets that a cut would be the Fed's next move. On a brighter note, trade balance figures for May were spot on with expectations, providing some short term relief for the dollar whilst initial jobless claims came out weaker than expected, signalling continued strength in the economy. Of course, it is common knowledge that economic figures provide a snapshot of the past and are typically subject to revision meaning that we don't really have a full grasp as to the current health of the economy.