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Political Risk Wearing on Investors

May 20th, 2010 Michael McDonough

Political risk, typically a relative constant in trading, has investors running for the doors this morning as concerns grow around Germany’s real intentions behind its short-selling ban, along with what regulations might come next.  Uncertainty is being compounded by the financial overhaul debate taking place currently in DC.  One comment that especially caught traders’ attentions yesterday came from Michael Novogratz, president of Fortress Investment Group, who said on CNBC, “The market is de-risking itself.”  He also said, “When you want to get short there are a lot of weapons you can sell.”  Glenn Dubin of Highbridge Capital added, “The sovereign debt crisis hit a wall and all bets are off,” telling CNBC. “We’re seeing massive de-risking.”

Risk indicators seem to confirm Novogratz’s and Dubin’s views showing no signs of easing this morning.  LIBOR has continued to climb reaching levels not seen since last summer.  At the same time AUDJPY, a popular carry trade and risk proxy, has plummeted.  Until confidence returns to the market investors will continue curbing risk, and as of right now no clear short-term catalyst can be seen in the pipeline. 

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