Yesterday's global stock market weakness is a warning bell of worse to come, not some passing "expected correction".
- The yield curve inversion (Fed Funds minus 10 year Treasury yield) has now reached 75 basis points, a situation that statistically signaled a recession 80% of the time.
- Real estate (an extremely important sector, see Feb. 25 post below) is continuing to weaken. The ABX indexes are still plunging and serious weakness is now apparent all the way to the AA tranches. This is not just market psychology, either. The underlying mortgage-backed securities are all reporting interest shortfalls (the amounts can be found on the same link as PDF documents). Take a look also at the CMBX indexes linked to commercial mortgages - they are plunging now, too: the BB tranche went from a spread of 200 bp to 322, the BBB- from 75bp to 155 bp and the BBB tranche from 50 bp to 112.
- The CDX indexes of US credit default swaps just took massive hits yesterday. The high yield (aka junk) category spread jumped by a massive 40 bp to 252 bp and the investment grade by 5 bp to 35bp. I think there is much more weakness ahead for the CDS sector as the virtuous cycle turns vicious.
- Both the yen and the swiss franc strengthened considerably against the dollar (yen from 120.50 to 118.20, the franc from 1.24 to 1.22). Their carry trades, the providers of extra cheap global financing for speculative purposes, are in unwinding mode.
- Speaking of unwinding, financial leverage has reached every nook and cranny of the planet from Australian mines to Zimbabwean stocks. It took years for this condition to arise and the reversal won't just cause a solitary hiccup.