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Daily Market Commentary

Friday saw a tick higher in new home sales data, which allowed the markets to end the week on a upbeat note.  A serious plunge in this number wouldn't have helped any, but it seems as if confidence is returning to the market.  As proof - last week saw higher treasury yields, a little bit of loosening in the US T-Bill market as some supply came back (although yields are still very low), and a bid coming back to the risk currencies.  We don't feel the need to mention much stronger equity markets over the week  This morning, there is even talk of the carry trade being "back on".  This all seems a little silly, as the fundamentals for the carry trade never really changed.  There are still low rates and plenty of liquidity in the Yen market, and higher rates elsewhere.  The attitude towards the riskyness of the trade, however, did change, and the amount of leverage allocated to the (previously) low-volatility trade has certainly declined.


  The only sector of the market that is still causing concern, and it is great concern in our eyes, is the credit side.  Any type of risk credit is still very dry, with few lenders stepping up to the plate.  So far the damage has been contained, and the market seems content to move on with the temporary fixes, like Conventry's roll from 30 day paper into 5-10 year floaters.  We are worried that this will have broader ongoing implications, specifically the avoidance of any kind of credit in the money markets.  This is risk aversion in its purest form, and while it seems contained to this sector only, we wonder how it cannot be spreading into other markets.


Consider this - why is the market avoiding Banker's Acceptance notes (in favour of T-Bills less a hundred basis points or more) but has no problem whatsoever bidding up Bank shares at the same time, which would ultimately rank FAR behind the BA's in the event of a bankruptcy?



Existing home sales numbers out at 10 am today.  We put far more stock in these than the New Home number out Friday, as individuals are less willing to throw in incentives like free dishwashers and marble counter tops when trying to unload inventory (note that this number is pre-credit crunch data).  Watch the tape.


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