Cross-posted from The Anti-Media.org
Highlighting conditions similar to the lead-up to the 2008 financial crisis, three major Wall Street banks this month issued warnings that a proverbial “Winter Is Coming” for planet-wide financial markets. From Bloomberg:
“HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.
“Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.”
Andrew Sheets, chief cross-asset strategist at Morgan Stanley, wrote in a note to traders Tuesday that a large part of the problem is that investments are increasingly untethered to Forex (FX), the decentralized global market for the trading of currencies.
“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Sheets wrote.
Morgan Stanley’s financial model shows that global assets are the least correlated they have been in a decade. Essentially, investors are basing decisions solely on factors specific to the individual stock and ignoring larger outside drivers like manufacturing data — just as they did in the last half of the 2000s.
“These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07.”
All this investor confidence has led to a decrease in stock market volatility. That’s not a good thing, says Steven Major, global head of fixed-income research for HSBC Holdings.
“Low volatility across asset classes may give a false sense of security and bond markets may be caught napping,” Major wrote in a note to clients on August 8. He added that “years of international spillover from quantitative easing” increase the risk that local triggers will have a greater impact on global markets.
Strategists from Citigroup, as well, fear that governments’ attempts to implement economic stimulus following the 2008 crisis — and the fact that those efforts are easing — could join with other factors to produce the next worldwide recession, as Bloomberg noted Tuesday:
“Citigroup analysts also say markets are on the cusp of entering a late-cycle peak before a recession that pushes stocks and bonds into a bear market.
“Spreads may widen in the coming months thanks to declining central-bank stimulus and as investors fret over elevated corporate leverage.”