The newsletter provides an overview about the economic situation and financial markets and also elaborates on currents equity and credit market developments. It also contains an article about risk issues raised by recent trends in financial markets.
The newsletter provides an overview about the economic situation and financial markets and also elaborates on currents equity and credit market developments. It also contains an article about risk issues raised by recent trends in financial markets.
Movements on equity markets have been highly contrasted since the beginning of the year due to fears of a systemic crisis in the banking industry, the report states. Investors were reassured about the resilience of the financial industry in the face of the subprime crisis, as the US Fed continued to cut its policy rates and loosen refinancing procedures for banks. In addition, some major investment banks, such as Lehman Brothers, Goldman Sachs and Morgan Stanley, published better than expected earnings.
The gloomy economic and financial environment also led to a slowdown on the primary markets. On the whole, equity issuance was down sharply, especially in Europe.
Contagion from the sub-prime crisis put the corporate finance sector and the credit derivatives sector at risk. “The robustness of this secondary market and of the underlying legal commitments with regard to credit insurance could be subjected to a full-scale, real-world stress test following the downgrading of the monoline insurers’ credit ratings in early 2008, an increase in defaults, as the business climate deteriorates, and a weakening of certain hedge funds”, the report says. The subprime crisis reveals shortcomings in the secondary market price formation mechanisms for certain assets.
With regard to post-trade systems on OTC markets the report states that the new markets “could be jeopardised by major operational problems and failures of their post-trade systems, making these systems a source of systemic risk for market participants”. It also notes that the systems could also turn out to be ineffective for regulators seeking to supervise the integrity of the market.
The AMF also warns that the current volatility of equity prices creates market opportunities and a growing number of new types of market players are using investment vehicles based in offshore jurisdictions that lack transparency. Risks related to this development include the price manipulation, insider dealing, and the risk of creeping takeovers and manipulating shareholder activism.
Economic and Financial Newsletter
© AMF - Autorité des Marchés Financiers
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