“Political uncertainty creates a bimodal distribution of risk, which is very difficult for the markets to price,” said Seth Rooder, Global Credit Derivatives Product Manager for Bloomberg, and the second of two speakers at the Global Association of Risk Professionals (GARP) webinar on November 15, 2012.  (Click here to view Part 1.)

Rooder was referring to the first of five main themes in global risk trends, as he sees them.  They are:

(1)    Economic and political uncertainty

(2)    Slowing global growth

(3)    Central Bank (CB) intervention

(4)    Continuing low yields

(5)    Increased regulation

Ever since the financial crisis of 2008, the markets have seen high volatility, spread compression, and technical differentiation between cash and credit derivatives, said Rooder.  He showed several Bloomberg screens of data analysis to back up his main contentions.

Rooder noted the European Central Bank “sparked a broad summer rally” in 2012.  There was not much sector differentiation and although the financial sector outperformed, “technology and consumer staples have underperformed.”  Unfortunately the spark did not spread to Japan, and it saw neither a summer nor a fall rally.  Japan appears to have “decoupled from global markets.”  Rooder’s analysis showed the absence of any rally may be due to  poor performance in the personal electronics and materials sectors.

At the end of his presentation, the webinar audience was polled:  what will be the biggest risk to markets?  The greatest number (39 percent) chose “trouble in the European periphery,” and the second greatest (29 percent) chose the looming “US fiscal cliff.”  A smaller number of respondents chose “slow growth in China” as the main danger.  Only 8 percent chose “regulatory risk” as the main danger, which, Rooder noted, “does not match the noise in the media.”  In his opinion, the biggest danger is whether the US deficit will be properly dealt with.

We will stay tuned. ª

The webinar presentation slides can be found at:  http://event.on24.com/r.htm?e=533739&s=1&k=2D77B52DE83507E0F9FC37553BBA1BBD