In a note released on Monday, JPMorgan’s Marko Kolanovic warned that the likelihood of a so-called Minsky moment – a sudden collapse in asset prices after a period of speculative growth – has risen in both the financial markets and in the realm of geopolitics.
He pointed out that “the process of bailing out several US banks did not succeed in calming the markets that consumed another large bank in Europe.” “In a Trichet-like moment, the European Central Bank raised interest rates by 50 basis points.”
Kolanovic said that the Fed is facing a difficult task on Wednesday, but it is probably already too late to prevent a recession. He said that a recession now looks inevitable, with the economy in a downward spiral and banks about to stop lending.
Kolanovic argues that even if central bankers are able to contain the spread of the financial crisis, credit conditions are likely to tighten further due to pressure from both markets and regulators.
He also notes that there are cracks appearing in the US credit fundamentals, and that euro credit spreads will likely continue to increase unless there is more proactive policy action taken by the US government.
The analyst noted that in previous periods of widening credit spreads, the US dollar has tended to strengthen, while other relatively safe currencies such as the Swiss franc and Japanese yen have also outperformed more volatile, high-beta currencies. The analyst added that they see little change in the fundamentals of the oil market at present, but that financial stress and macroeconomic uncertainty have boosted demand for safe-haven assets such as gold and silver.