Intraday Market Thoughts

The Downgrade Headwinds Are Blowing

by Adam Button
Jan 25, 2016 22:39

A crisis usually starts in a pocket of the economy and then moves to the financial sector. The commodity bust was back in focus after a fresh fall in oil Monday. The euro was the top performer while CAD lagged. Australian markets are closed for holiday today. A new Premium trade in an index was issued today, backed by 2 charts and analysis.

فيديو العربي--  - كيف نتداول ارتداد البورصات؟ - لا يوجد ارتداد/هبوط نظيف.

We wrote about escalators and elevators yesterday and it was the trend of risk aversion that reasserted itself Monday. It looked to be a quiet day with New York cleaning up from a blizzard but as the day wore on, oil began to slide and then risk trades joined in. The S&P 500 fell 30 points to nearly wipe out Friday's rally.

One of the headlines that weighed was a Fitch downgrade of oil-services company Weatherford International. The company has $7.5 billion in debt, which is a long way from the $57B of an oil giant like BP but underscores a few points.

One is the uncertainty about how that debt will be rolled over and at what rates. High yield bounced late last week but lower-rated oil companies are paying upwards of 17% to borrow. Along with lower oil prices, it's a death-spiral-inducing combination.

The natural reaction of markets is to get away from anyone who might be exposed. The memory of subprime and the hidden risks is probably making markets overreact to the financial risks but the global economic risks of oil are much higher, with a number of countries in dire straits because of budget shortfalls.

The headwinds come from the steady stream of downgrades that are inevitable. Ratings agencies  are always reactive and late but it's impossible to sustain a recovery until the headline risk is gone. It's reminiscent of the Eurozone crisis when no one wanted to buy the euro because of the ever-present risk of another sovereign downgrade.


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