Mixing U.S. and global troubles makes dangerous market cocktail

Marketplace Staff Sep 23, 2011

Mixing U.S. and global troubles makes dangerous market cocktail

Marketplace Staff Sep 23, 2011

Jeremy Hobson: What is spooking the markets? Chris Low is chief economist with FTN Financial. He’s with us live from New York, as he is every Friday.

So Chris, is this all about the Fed’s negative outlook for the economy a few days ago? Or is there more to this?

Chris Low: Well, look, that was certainly a factor. But I think the bigger thing is what’s going on in Europe. It certainly is all that people are talking about on U.S. trading floors right now. And primarily, it’s European banks who are having a terrible time getting liquidity. And that is weighing on European equities, and that weakness is translating overseas.

Hobson: And what about the news from China that their economy is slowing a bit?

Low: There is that too, and in fact, the real popular trade this year with hedge funds — who of course are laying hundreds of billions around the world — has been a risk-on trade, that involved investing big dollars in emerging markets and commodities. And they have been unwinding that trade aggressively the last couple of days.

Hobson: All right. Well we have some domestic news as well that may be weighing on things. And our Washington bureau chief John Dimsdale joins us now with that concern.

John Dimsdale: Yeah, that’s right — squabbling between Democrats and Republicans once again is threatening to close down the government. October 1st is the new budget year, and they can’t agree on a spending package. What’s tripped them up this time is replenishing the disaster relief fund for the Emergency Management Agency. The House, overnight, passed a scaled-back FEMA budget, but the Democrats in the Senate are expected to quickly defeat it today.

And you know, the differences that have triggered this latest gridlock are pretty small in the grand scheme of things. There’s about a $3 billion gap between the two sides — you’ve got to wonder, how can they find more than a trillion dollars in deficit savings before the year is out.

Hobson: You do. And Chris, how does this potential government shutdown play into all of this?

Low: Look, it’s a factor too. When you look back at the course of this year before this week, the worst week for the Dow was during the debt ceiling debate, when of course, government shutdown was a worry. So no question that’s a factor too.

Hobson: Well, if there is trouble here in the U.S. and big investors like hedge funds, as you mentioned, are sort of dumping the emerging market stuff that they have. Why are investors moving toward U.S. bonds, for instance, which have interest rates dropping right now?

Low: That’s a great question. And the answer is, when you take off the risk-on trade, you put on the risk-on trade — you have to put your money somewhere safe. And despite all of the stuff going on in Washington, U.S. Treasury bonds are still seen as one of the safest, most liquid markets in the world.

Hobson: Chris Low, chief economist with FTN Financial, thanks Chris.

Low: You’re welcome, thank you.

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