![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Pressure point
November looks set to prove another tough month for hedge fund managers and bank prop trading desks. The optimism of some pundits following a market rally in September that global credit markets and the bank funding system was shrugging off mispricing of the risk premium in the past several years proved short-lived.
Volatility moves in November resembled those seen in August, and the omens do not augur well for the short term. There is a severe decoupling between the troubled credit and funding markets and the buoyant equity markets. The spread between three-month US Treasuries and Libor has reached levels not even seen in 1997/1998, when the Asian financial crisis, coupled with the near-default of hedge fund Long Term Capital Management, sent shivers through the financial markets. But equities aren't far off all-time highs - both in Asia and the US.
Most local senior executives in Asia believe the region is significantly isolated from the troubles in Europe and the US. Given strong corporate earnings in the region - and in the Europe and the US - the buoyancy of equity markets does not immediately come as a surprise. But there are concerns this may be a short-lived phenomenon. Asian inter-regional consumption is growing fast. But if the US goes into recession, the region's exporters will face significant problems.
Clearly, something has to break - either liquidity returns to the credit and funding markets or equities are due for a major tumble, even in Asia. And this seems to centre on whether US supervisory action will work to ease funding issues.
For a change, the most critical action may not stem from the Federal Reserve Boards' easing of the Federal funds rates. US treasury secretary Henry Paulson appears to be driving actions aimed at curtailing problems in financial markets.
His efforts to create a 'super-Siv' seem to have floundered. Asia's 'old hand', HSBC, partly scuppered these efforts by bringing $45 billion of its special investment vehicle commitments on balance sheet. Japanese interest also looks to be waning - and it's unclear why Japan's banks should bail out the overindulgence that took place in the US, unless, of course, they are more involved than they have let on.
Paulson appears to be using Asian tactics to delay the implementation of realistic mortgage interest rates following the end of US teaser promotions.
Whether these coordinated efforts will work or not is still open to question. And it's unlikely to become clear until the release of end-of-year audited results - accompanied by Sarbanes-Oxley-era potential jail time for senior executives that understate their problems.
Christopher Jeffery.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Structured products
A guide to home equity investments: the untapped real estate asset class
This report covers the investment opportunity in untapped home equity and the growth of HEIs, and outlines why the current macroeconomic environment presents a unique inflection point for credit-oriented investors to invest in HEIs
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…