Markets Face ‘Perfect Storm’ Four Years On: Strategist
As we approach the fourth anniversary of the beginning of the financial crisis, one analyst believes markets could be facing a “perfect storm”
“We do not subscribe to Armageddon. Yet, with the broader macro backdrop deteriorating, contagion in the euro zone spreading and sources for further bailouts and stimulus limited, we have reason to revise our yield forecasts lower – also under a more benign scenario” said Rainer Guntermann, a strategist at Commerzbank in Frankfurt said in a research note on Friday.
It was on August the 7, 2007 when the first signs of the crisis that led to the collapse of Lehman Brothers became apparent. The crisis which has left the world facing a sovereign debt crisis that the most bearish analysts believe could be worse than the fall of one of Wall Street’s biggest names.
“Four years later, many backstops have been installed and tons of stimulus administered. This has tamed stress symptoms and cushioned the economic fallout. But the root cause of the crisis – excessive debt and leverage – has not been resolved,” said Guntermann.
With the amount of money banks are depositing at the European Central Bank soaring in recent days, Guntermann said that until we see a major response from the central banks, sentiment will be bad.
“Until it steps in to also buy Italy and Spain in size, however, the market will keep questioning its resolve. In the US, default has been averted but at a high cost,” he said.
With political disputes now the norm, Guntermann predicts even weaker growth and money pouring into bunds, Treasury and Gilt markets.
“The structural low yield environment lives on and we are forecasting 10 year Bund, Treasury and Gilt yields to stay below 3 percent for most of our forecast horizon. Under a more adverse risk scenario yields could easily slip below 2 percent,” he said.
“Such a tail risk scenario has become more likely in recent days. Even though it does not constitute our baseline, peripheral bonds will require elevated risk premia as long as the fat tails persist” said Guntermann.