Rumours abound: Uncertain markets are always marked by rumours and refutations, although seldom as obviously as this week.
The Wall Street Journal, citing an anonymous BNP Paribas executive, reported that the French bank had lost access to dollar funding. That was "categorically" denied by the bank, which called for an inquiry into the report.
Markets jumped after the FT reported that a Chinese fund was in talks to buy Italian bonds, only for Reuters to report that the talks were about industrial assets, not bonds. Rumours of Russian and Brazilian purchases of Italian bonds also did the rounds, while the Dutch finance ministry said it viewed a Greek default as a “scenario”, not an inevitability, as reported earlier.
On Tuesday, one stressed-out broker sent out a mock-serious diary note describing the febrile atmosphere.
“11.30-12.30 Mkt rallies like crazy because Sarko Merkel to make an announcement – except nobody knows what that the announcement is for.
“12.40-12.50 Mkt crashes because they’re not going to make announcement.
“12.56 Figure out how to explain to a child that ‘yes dear, there’s a lot of clever people who think very hard make very bright decisions in the stock market business!’ ”
ETF investigation: US regulators are investigating whether exchange-traded funds (ETFs) are contributing to the recent market volatility. ETFs accounted for 29 per cent of trading volume in August, with leveraged ETFs seeing a particularly big increase in trading.
Still, might there be other factors at play? Such as Europe being in a “state of financial collapse”, according to hedge fund legend Julian Robertson?
Might investors be worried by a former Argentine central banker advocating that Greece “default big”, or influential Citigroup economist Willem Buiter warning that a Greek exit from the euro would cause bank runs across Europe?
Is this partly why the German Dax, French Cac 40 and Spanish Ibex have all lost a third of their value, almost double US market losses?
The ETF investigation, one might conclude, can wait.
Diversification dysfunction: Looking to reduce risk by diversifying? Good luck with that – the difference between investing in emerging markets, developed markets and high-yield bonds is now "effectively zero", according to a note this week from ConvergEx.
It found that correlation in US stocks is at 97.2 per cent – that’s “dysfunctionally high” and unseen since the Lehman collapse.
High correlations will “plague” markets for the rest of 2011, as they are “fundamentally” caused by fears over European financial market solvency. “Those aren’t going away any times soon.”
