Upcoming Shorting Opportunities - RBA Warning on Market Risks

Submitted by Marco on 8 April, 2006 - 10:52

Is it time to bust? A time for market readjustment. I mean, its been a while since the last major crash... Anyway, the Reserve Bank of Australia (RBA) have accused the financial markets in their short sightedness in their factoring in risk and that a significant readjustment may be coming. We have had a long bull run - a long run of stable global growth and inflation. And this situation may have given investors a false sense of security given that global bond yields are well short of their long-term averages. The RBA recently released a quarterly financial stability review and in it they stated: "While the current environment of very low volatility may continue, experience suggests that when economic outcomes are consistently favourable over a run of years, investors tend to underestimate, and thus underprice, risk. It would therefore be surprising if there were not at least some element of this type of myopia in financial markets currently."

So the problem is this phenomena of underpriced risk inherent in today's stable markets. In the report, the RBA continued to point out several threats to the stability of global markets:
* A pandemic of avian influenza;
* Removal of Japan's zero interest rate policy;
* Slowing in global growth;
* Pick-up in inflation;
Are some reasons that the global economy may force a sudden readjustment in risk pricing.

So the markets have been optimistic - a result of this long term stable growth. RBA says that "A concern for some time now has been that the apparently optimistic expectations that underpin many asset valuations and borrowing decisions may not be realised, prompting sharp adjustments in a range of markets." On the other hand, the financial markets have displayed resiliance against potentially destabilising events such as the rising US interest rates and downgrading in value of several corporate bonds.

The main concern is the boom of lenders offering low-doc, no-deposit mortgages with high repayment levels creating heightened risks in any event of an economic downturn.