Friday, October 30, 2009
The stock market is spooked today, with prices dropping and implied volatility soaring. This is arguably the most significant "panic attack" the market has had since earlier this year. In my informal survey of the news today, I see almost universal concern that the positive GDP report yesterday was just a blip, that the economy remains very weak and vulnerable to another decline. Of 10 stories about the economy, at least 9 look at the numbers and can't find any reason to be hopeful. I think this is an exaggeration, but panic attacks like this are part of any recovery story.
When the market suddenly gets scared, my first reaction is to check the status of the market-based indicators of economic fundamentals to see if anything has changed. I can't find any evidence of deterioration in the numbers. Take this chart, for example, that shows spot commodity prices at their highest level of the year.
Swap spreads (next chart) show absolutely no sign of any increased tensions in the market. In fact, you couldn't ask them to be better-behaved. CMBX and ABX prices are still in a rising trend. Inflation expectations built into TIPS prices are near their highs of the year, suggesting that the bond market isn't worried at all about a deflationary slump. Sep. '10 eurodollar futures are trading at all-time highs, suggesting that the market is not concerned at all about an imminent Fed tightening which might upset the economic applecart.
The dollar is weak, but it hasn't moved much for the past six weeks. Gold hasn't gone anywhere for the past three weeks. Oil is only a few dollars higher than it was last June. The Baltic shipping index is 50% above its average for the past year. Credit spreads are within inches of their lows for the year
Perhaps it's just that Halloween has come a day early.
Posted by Scott Grannis at 11:27 AM