Legacy Wealth Weekly - August 21, 2015 (Credit Spreads, US Homebuilders & August 1998)
Penni Johnston-gill - Aug 21, 2015
North American Portfolio Strategist Martin Roberge questions whether US credit spread are sending the right signal. US Credit spreads are back to 2011-2012 highs. Credit risk was an issue in H2/2014 owing to the plunge in oil prices but this time,
North American Portfolio Strategist Martin Roberge questions whether US credit spread are sending the right signal. US Credit spreads are back to 2011-2012 highs. Credit risk was an issue in H2/2014 owing to the plunge in oil prices but this time, the widening spreads seems more of a supply or liquidity issue rather than rising financial stress.
Martin believes US homebuilders are far from overvalued. A record low homeownership, easy mortgage lending standard and robust labour market should take US housing starts to the 1.4 million mark from the current 1.2 million.
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Martin notes the current turbulence is reminiscent of the Asian crisis in summer 1998 or EM currency crisis 2.0. In version 1.0, the US$ bull market eventually led Thailand to unpeg its currency, a move that preceded the devaluation of other EM currencies such as the Indonesian rupiah, the Brazilian real and the Russian Ruble. So far in version 2.0, China, Vietnam and Kazakhstan have devalued their currency while Russia has pegged the Ruble to oil prices. In times of market stress, it is always difficult to identify catalysts that will halt the turmoil. However, the whole EM currency complex has reached a non-sustainable riot point and something will have to give. And this something has to translate into a weaker US$. As Martin’s Chart of the Week shows, a break in the US$ in September 1998 brought financial market stability and the ensuing recovery. While the Fed cut rates back then, this time around, hiking or not in September is irrelevant. The Fed must take its dot-curve down to the bond market expectations. With long positions in US$ pits very crowded, a phase of US$ liquidation could stabilize EM currencies and allow EM central banks to proceed with monetary stimulus.
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