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Market Intelligence: Contagion and Carry Trade Fears Rule the Day

As the market grapples with concerns about the cost of capital and whether contagion is spreading through the bond market, economic data that is scheduled for release could help to ease investors fears.

Pimco founder and chief investment officer, Bill Gross, in an interview on CNBC rattled the markets after warning investors to pay more attention to what's been happening in the high yield corporate bond market where yields have jumped 150 to 200 basis points in the last six weeks.

In his monthly outlook published on the Pimco website, Gross stated, "the tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market. And because it has been a Nova Scotia tide, rising in increments of ten in a matter of hours, it promises to have severe ramifications for those caught in its wake."

At 10 a.m. New York time existing home sales are due on Wednesday and later in the week new home sales and GDP data will also be released.

"New and existing home sales could change the tone," says Hugh Johnson, chairman and chief investment officer atJohnsonIllington Advisors. "If you see that activity is flat and that the year to year decline in home prices is modest and you also see some decline in the inventory overhang, that’s going to help quiet some nerves".

Johnson also frames the present market gyrations into historical perspective. "It’s of some interest to look back at the last time we had a real scare to the markets that was similar which was 1998 and Long Term Capital Management's collapse." Johnson says, "the market declined sharply in August, 1998, but the returns were positive and good following the crisis. I think it’s useful for investors to keep some perspective in looking back" at past crises.

Stanley Nabi, who helps manage $8.3 billion at Silvercrest Asset Management calls credit market questions a "side show" and describes today's selloff in the stock market as "substantially more psychological than fundamental."

Nabi believes the slump in the housing market will "not drive the economy into a recession and adds that inflationary pressure remain more of a concern that could "force the Fed's hand to lift rates by the end of the year".

Oppenheimer's chief strategist, Michael Metz says today's selloff was "really a concern about bad credit and its ramifications." Metz calls it an "opaque system that no one has a clear handle on".

He adds that portfolio managers who had "decent returns this year where selling just about anything today trying to nail down some profits".

The other "tinder box" says Metz is signs of an unwinding Japanese yen carry trade in the after math of recent gains in the Japanese currency. He says the exact dimensions of the carry trade are also not known, including leverage that's involved in the trades, but points out that carry trade unwinding was a big factor in the late February and early March stock market decline.

Metz says the carry trade has been a successful strategy for a long time, but "one that has gotten very crowded and impossible to quantify".