Whiplashed into submission

1.3 trillion dollars of market value evaporated into thin air over the week as a result of a flurry of bad news (in an almost coordinated fashion) hitting investors by materially denting their appetite for risk. Disappointing German business confidence figures was followed by weaker than expected U.S. durable goods orders and new home sales, and an unexpected earnings disappointment for Exxon Mobil Corp., triggering a global equity sell off. The prevailing mood was one of pessimism as investors began contemplating the effects of a protracted housing slump and markedly higher borrowing costs on businesses, consumption and ultimately growth. The downward revision in risk premiums and the ensuing flight to quality led to a rally in treasuries, a further widening of credit spreads across the board and the unwinding of carry trades. It also led to several big ticket debt issuance postponements as borrowers began to asses the impact of an increasingly expensive corporate credit market. Volatility, which had been on an uptrend ever since the China related turbulence of late February jumped up again as a result of these events. The gloom is also reflected in the the futures market for the federal funds rate which is at the moment anticipating a quarter point cut by the end of the year with a conviction of 100%.