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Credit Suisse: Our Clients Feel 'Lost' and 'Bearish'

Credit Suisse: Our Clients Feel 'Lost' and 'Bearish'
(Dollar Photo Club)

By    |   Friday, 16 October 2015 08:32 AM

Credit Suisse has published a survey of what its clients in the U.S., Europe and Asia think at this moment.

In their “Client Perspectives” survey we read, “Two words summarize client marketing in the past month: ‘lost’ and ‘bearish.’ This is the first time that we have come across so many people who say they are completely ‘lost’ in the current environment.

Credit Suisse said it found out its clients were the most negative on record on the global growth outlook.

The possibility of China facing a hard landing was, unsurprisingly, on top of CS' clients minds. Interestingly, Credit Suisse adds it thinks it is unlikely China will undergo an “orderly” deflation and it sees a high probability of China eventually ending up in a hard landing as a result of China’s triple bubble – in credit, real estate and investment – and because of that we see now near record PPI deflation, a record fall in house prices and record foreign-exchange outflows. 

Besides all that, and as high-yield spreads are widening, many clients expect some kind of a “credit event” like in 1998, which then provides a policy response and a "buying opportunity."

That said, it’s a fact that historically rises in spreads have preceded equity bear markets (115 bp on average over 3 months), but it must also be said 70 percent of the time credit spreads have risen by as much as they have recently, equities have continued to rally.

In simple words, the jury is still out.

Finally, two-thirds of the Credit Suisse clients believe a rise in fed-funds rate would be a policy mistake, while one-third believes it would remove the uncertainty, give a vote of confidence in the economy and would be a “dovish tightening,” giving the Fed some capacity to ease policy into the next recession.

Meanwhile, the Chicago Board Options Exchange (CBOE) SKEW Index suddenly spiked 15.4 points, or 11.34 percent, to a record high of 151.22. The SKEW index’s average since 1990 is 117.27, with its low at 104.89 on May 30, 1997. SKEW quantifies additional risk. That sudden SKEW spike means “Watch out! There could be high risk of a Black-Swan-like-crash event out there!”

(The CBOE Skew Index is an option-based indicator that measures the perceived tail risk of the distribution of S&P 500 log returns at a 30- day horizon. The value of SKEW increases with the tail risk of S&P 500 returns. The SKEW close to 100, the probability of a steep market decline remains very small. As SKEW rises above 100, this probability increases. Since 1990, the SKEW never came above 150.)

At the same time, the Chicago Board Options Exchange (CBOE) Volatility Index, which tracks the S&P 500 and that shows the market’s expectation of 30-day volatility using the implied fluctuation of a range of S&P 500 index options, fell about 11 percent. That drop signaled expectations are growing that central banks, including the Fed, will keep easy-monetary policies (QE) for a longer time.

It’s clear markets don’t seem to take into account that only four Fed members didn't favor a rate hike this year, while every other Fed member did want to act in 2015.

The Fed members that are against a Fed rate hike this year are:
But the other side continues to state their case for a hike now.

“Based on my current assessment of the outlook and the risks around the outlook, I believe the economy can handle an increase in the fed-funds rate and that it is appropriate for monetary policy to take a step back from the emergency measure of zero interest rates,"  Cleveland Fed President Loretta Mester said.

"Delaying the start of liftoff for too long risks having to move rates up more aggressively later on.”

As an investor, the only thing we can do is to wait and see what the next FOMC statement on Oct. 28 will hopefully tell us.

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It’s always interesting to know a little bit of what other investors in various regions of the world think.
credit suisse, investors, economy, fed
Friday, 16 October 2015 08:32 AM
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