Every day, equities, currency and bond traders weigh the good news with the bad to determine if they want to buy or sell.
Today, there were just as many positive reports that should have helped to stabilize the markets but has instead failed to stem the bleeding in equities and currencies.
In a market environment where pessimism is being felt in the bones of investors, it has become increasingly difficult to shift market sentiment.
The US dollar and the Japanese Yen continued to outperform as risk aversion drags nearly all of the major currency pairs lower. Even though USD/JPY has remained unchanged, the EUR/USD and GBP/USD fell more than 200 pips.
The Good News: US Government Accelerates Efforts to Minimize Foreclosures
As investors remain nervous about the outlook for the global economy, good news has failed to have a positive impact on risk appetite. Today officials from the Treasury and the Federal Housing Finance Agency said that through Fannie Mae and Freddie Mac they plan on accelerating efforts to help homeowners that are facing foreclosures. This includes reducing interest rate and extending loan terms, which should have been perceived as a step in the right direction. More specifically, the mortgage servicers will help borrowers who are more than 90 days delinquent bring their monthly payments down to 38% of their gross income, which is now considered the threshold of affordability. For an American that earns $75,000 a year, affordable means monthly payments of $2375 or under.
In addition after falling to a record low, IBD/TIPP reported a material improvement in economic optimism.
The Bad News: Fears of GM Bankruptcy
However the market has completely shrugged off the positive developments and has instead chosen to focus on the fears that General Motors will be forced into bankruptcy. The White House has indicated that they are open to accelerating the loans previously approved for the auto industry while House Speaker Nancy Pelosi called on Congress to pass an emergency rescue package for the industry.
$25B loans were originally allocated to the automakers for developing more fuel-efficient vehicles, but the legislation could be changed to divert the money towards more urgent initiatives such as helping the automakers fend off bankruptcy.
Given President-elect Barack Obama’s pledge to help the auto industry last week, official support is inevitable. However if the government does not act fast, the market could push the automaker into bankruptcy. On Monday, analysts issued price targets of zero for GM’s stock. With 263k workers under their umbrella, General Motors could be too big to fail.