Risk aversion back on

Last week the world seemed intoxicated on high hopes that the global recession was ending. In just one month ended Aug 7, world indices gained 12%. Wow; incredible rally.
Over the past few days though, sobriety appears to be kicking back in. The barometer of world shipping, the Baltic Dry Index, has now fallen 25% over the past 9 days; now back to May levels. The VIX or volatility index has spiked more than 12% since Friday; emerging markets are pulling back and the US dollar and high quality bonds are seeing inflows again.
At present levels, the S&P 500 is pricing in a significant earnings rebound for 2010 and emerging markets have been pricing a hearty resumption of western consumption. Both of these assumptions are seriously in doubt.
Today the Singapore Minister of Trade and Industry threw a blanket again on resurgent decoupling hopes, saying there were “few signs of a decisive turnaround in final demand in Singapore's key export markets.” Without buy-happy western consumers, Asian growth will be much slower than desired.
This time, thanks to the massive credit overhang, rate cuts alone are not able to revive the housing sector. Without the housing catalyst to kick-start and lever renewed consumption, growth has a massive headwind. See the following clip, Housing Mess is not over, for an update on US housing:

I fear that the next few months could astonish those thinking markets have recently hit a “permanent new plateau.”

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2 Responses to Risk aversion back on

  1. Anonymous says:

    Hi Danielle,
    I feel the markets are a bit toppy at the moment and look like they are poised for a pull back. I know that you use etf's to invest. What happens to these etf's if the holding company becomes insolvent? Do the etf's become worthless? Your insight would be much appreciated.
    Thank you,
    Parm

  2. Anonymous says:

    The structure of ETF's should be that they are set up as a trust fund for the unit holders and are held separate and apart from the assets and liabilities of the sponsoring companies. In this format, even if the custodians have solvency problems the trust funds would be ok. This is the only type of structure that I would be comfortable with as an investor.

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