Tuesday, May 26, 2009

Looking For The Next Sell Sign

We all know markets come and go, and as keen as I am on the bull run, I also know that there should be some form of downtime for the markets. While I do not think we will revisit the lows anytime soon, I do think that there will be periods of prolonged weakness. Always keep an eye out for things that could evolve into a Sell signal.

US banks are ok now, so too are the automakers - when I say ok, I meant them not needing further bailouts over the next 6-12 months, not the real health and viability of these companies for the longer term.

An interesting development was when S&P warned that it could downgrade the UK government's credit rating because of its heavy debt burden. Seriously, shouldn't S&P be saying that to the US??!!!

The looming danger with that kind of statement is that it will cause some sell down in UK and US bonds, especially since the UK and the US are preparing to issue truckloads of bonds. Maybe not so much in the US case as they sell truckloads of bonds regularly. In the UK case its more significant because one can expect any new bond sale will come at much attractive yields, owing to UK's not so good balance sheet going forward. Sell current ones and wait to buy the new ones.

Even though UK's gross debt at 63.6% of 2009 GDP, which is still lower than France's 76%, the USA's 78% and Germany's 66%, UK's public finances are more exposed because of the higher risks that international investors might be forced to sell UK bonds. International investors hold some 40% of UK bonds and many might have to sell if the downgrade actually comes through because many are not allowed to hold debt that is not rated AAA.

Having said that, the markets are already adjusting itself to pacify the concerns over UK. The pound will be weaker till the time they issue the bonds, by then the yield would be enhanced in the eyes of foreign investors via a weaker currency exposure when buying in. As long as that happens, the big sell down will not be there. Still, this development bears watching. To a large extent, the S&P news has been priced in via the UK bonds yield and the sterling's weakness. The danger to be wary is if this is just the beginning of a series of downgrades - i.e. next might be France or even Germany, then it could turn into a tsunami of risk aversion again - better be aware and follow developments closely. No danger for now.

p/s photo: Pace Wu Pei Ci


see said...

Wouldnt funds flee these countries with more rating downgrades? And more liquidity finding its way to Asia. Then there will be a serious asset bubble

solomon said...

When the line is not clear between the rating agency and companies/countries, could they afford to downgrade by simple fact or there will be political pressure emerge from somewhere?

Local front, I am predicting the economy to shrink 6.1% qtq. See whether this will come true....