Well today we saw how the world markets can interact - globalization was in full form and effect. China's stock market dropped approx 10% overnight and the sympathetic tsunami came ashore on the north american markets this morning causing a watershed of 400 points in the DOW and over 300 points in the Canadian markets. Gold was down - the baby might be thrown out in the bath water - time will tell tomorrow and later this week.
but what does that have to do with our mortgage market....well there will be a flight to safety which means bond yields will be pushed higher on greater demand and rates will move up - thus the potential for lower interest rates in the short term may be hampered.. however....
The US economy is definitely slowing on the back of a declining housing market - if the stock market follows - the average american will encounter the reverse wealth effect - in otherwords they will feel poorer than they are feeling today - this would possibly move them into a defensive mode of protecting their money rather than spending - this would force the US to reduce interest rates in order to hopefully spur the economy - this drop in rates internally might work but they may be forced to increase external rates in order to keep their dollar from plummetting - a very tricky situation.
For now - keep an eye on the bond markets in Canada - this morning the 5 year bond dropped below 4% as did the 7 year government bond - this is down from the 4.10% level of approx a week ago - if this persists - rates should drop - especially after the RRSP season is finished on March 1st .......lets see what happens. (greygoose out...)
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I agree with greygoose on the flight to quality assessment.
I play the Motley Fool's CAPs game http://caps.fool.com/, where you pick stocks to outperform or underperform, and it tracks your performance relative to the S&P500.
My position there right now is 80% underperform (short). Before last week if the S&P500 went up 1% my CAPs score would go down 30-50 points as you might expect. Last Wednesday however, on the morning rally after Non-Phat Tuesday, when the S&P500 was up 1% my CAPs score was UP 100 points! While the big caps were being bought, the junk around them was still being sold. Greygoose's flight to quality, quantified in numbers.
This big up-tick in fear immediately prompted me to sell 65% of my portfolio into the strength the market was offering, and I sold another 10% on Friday.
Good analysis, GG.
See ya later,
Allocator :)
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