It will be difficult for US traders to enjoy their day off today (it’s Martin Luther
King’s day) with a complete meltdown happening in stock markets around the world. The UK’s FTSE index fell 5.48% or 323 points, the worst single day loss since 9/11 in 2001. The MSCI World Index dropped close to 3%, the largest decline since Sept 2002.
But even bigger percentage losses were seen in other countries:
German DAX Index -7.16%
Paris CAC-40 Index -6.83%
Hong Kong’s Hang Seng Index -5.49%
The selling began in Asia on speculation that Bank of China could be forced to write off a fourth of their nearly $8 billion subprime mortgages holdings (Marketwatch story).
Unless Dow futures recover significantly Tuesday morning, US markets could be setting up for a very ugly open with Dow Futures down over 500 Points!
The US dollar is up across the board on rising risk aversion while carry trades are headed for their worst drawdown since the Euro’s inception:
Be careful! The worst of the mortgage mess is not behind us.
Carry trades live and die by 3 things:
1. Volatility
2. Risk appetite
3. Direction of monetary policy.
Unfortunately, in the current market environment, all 3 of these factors are not favoring carry trades. Volatility across the financial markets has surged. The VIX which is a measure of US equity market volatility closed last week not far from its 4 year high. Today, the VDAX-New Index which is a measure of European equity market volatility surged 39 percent, the largest rise since 2001. Risk appetite has plunged with the collapse in equities and central banks around the world are shifting from monetary tightening to monetary easing.