Bond Outlook July 23rd

While the flow of bad economic news continues unabated, this last week has given some respite, probably only brief, but welcome. Oil and most other commodities have fallen from their peaks, giving hope (but only hope, not certainty) that the commodities bubble has now begun deflating. Stock markets have risen from their lows thanks to the restrictions on short-selling and a sense of relief over the GSEs. Spreads on both emerging markets and low-credit bonds have ceased widening. US exports are doing well, as are German.

Is the crisis all over? Readers would indeed be shocked if we said it were! It is rather a case that the bad news is so persistent that it is discounted, and many investors prefer to chase the few rays of sunshine which appear as above. In the meantime:

• Wachovia announces a USD 9 billion loss
• the monoline insurer, FSA, is following MBIA and Ambia in being downgraded (with a very negative impact on the shares of parent company, Dexia)
• HBOS in the UK has raised the extra equity capital it sought, but largely at the expense of the underwriters
• History shows that stock market rallies based on rules against short selling are short lived (so short-lived in the recent case of Karachi that investors trashed the stock exchange!)
• The GSE saga has much further to run – the current government bail-out can only be palliative
• Mortgage rates in the USA are rising, reinforcing the housing decline (curiously, mortgage rates in the UK are a little off their peaks of a month ago.