Experts Talk Goldman Impact, Volatile Stocks
Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Apr. 19.
Vassili Serebriakov, Wells Fargo Bank
Financial markets have been in the "risk off" mode since the SEC charged Goldman Sachs (GS) with fraud on [Apr. 16]. As a result, equity markets are slipping around the world, boosting demand for safe-haven currencies such as the U.S. dollar and the Japanese yen. Thus, it is of little surprise to see slippage in the commodity and emerging-market currencies [in early trading Apr. 19].
The euro is also back in the doldrums, with the spread between Greek and German 10-year government bond yields reaching another record high. It increasingly appears that last week's 45 billion-euro bailout announcement failed to lower immediate borrowing costs for Greece, and should the current situation persist, Greece may have no choice but to turn to official aid sooner rather than later. It is the uncertainty about the details and the mechanism of such aid that in our view should keep the euro on the defensive this week.
More broadly, although we see market jitters persisting in the coming days, we do not see a return to a multi-month bearish trend in risk appetites.
Scott Sprinzen, Standard & Poor's Ratings
Standard & Poor's Ratings Services…has not, at this point, changed its view regarding the creditworthiness of Goldman Sachs & Co., the principal U.S. broker/dealer of Goldman Sachs Group, as a result of the securities fraud complaint filed on Apr. 16, 2010, against the company.
We believe that it would be premature at this point to draw any conclusions about the outcome of the SEC's complaint. We also currently believe that it's unlikely that any monetary payouts that could ultimately arise as a direct result of the case will be sufficiently large to materially affect our view of Goldman Sachs Group's overall financial profile.
Nevertheless, we believe that the fraud complaint and other recent criticisms of Goldman Sachs Group's business practices—such as criticisms related to its role in structuring currency swaps for the Greek government—raise issues regarding potential lasting damage to the company's reputation. Broadly speaking, Goldman Sachs Group's business franchise and funding correlate with the level of confidence of its clients, counterparties, and creditors; hence, reputation is an important rating consideration. Reputational damage could be a critical rating consideration for the company depending upon the degree to which such damage affects its fundamental business and credit profiles. As a result, we cannot rule out the possibility that potential reputational damage ultimately could adversely affect the rating.
Roger Volz, BCG Financial
We believe that current volatility levels represent an excellent opportunity to hedge out what could be a volatile earnings season. Timing a correction is always difficult. However, if this quarter's earnings shows a rough resemblance to the last two quarters, we can expect a correction to start this week or next, 7%-9% broader index correction and a spike in volatility. We believe the correction will be short-lived—lasting two to three weeks.
Negative news flow, led by Goldman Sachs and Google (GOOG), has accelerated selling pressure with stock trading beginning to favor defensive names.
Marc Chandler, Brown Brothers Harriman
India's central bank is expected to hike key short-term rates by 25 basis points at [its Apr. 20] policy meeting. However, the risk is that officials could hike rates 50 basis points and/or increase the required reserve ratios. Currently, the reverse repo is set at 3.5% and the reverse repo rate at 5.0%. The reserve ratio stands at 5.75%.
Consumer inflation in India is among the highest in the G-20 with urban CPI running just below 15% in February year-over-year. The wholesale price index is near 10%. India typically experiences rising price pressures earlier in its business cycle because it has a poor job-expanding capacity. In particular, it under-invests in infrastructure and this in turn creates inefficiencies, bottlenecks, and price pressures. Meanwhile, foreign investment in Indian equities appears relatively robust.