Daily Commentary by Larry Baer: The pressure on the members of the European Union ratcheted up a notch this morning when rating agency Standard & Poor threatened to downgrade many of their sovereign debt issues by one, or in some cases, two levels. The unprecedented warning was seen by many analysts as a wake-up call directed to the European leaders gathering for a two-day summit on Thursday and Friday that global investor patience is wearing thin with the snail-like pace of financial reform in the area.
This crisis is an "on/off" switch for the trend trajectory of mortgage interest rates here at home. If the crisis ends with the dissolution of the euro as a common currency - global capital will likely remain firmly entrenched in the relative safe-haven of dollar denominated assets like Treasury debt obligations and mortgage-backed securities. Such an outcome will almost surely prove very supportive of the prospects for steady to perhaps fractionally lower domestic mortgage interest rates.
In the unlikely event the members of the European Union are successful in their efforts to cobble together a far-reaching financial reform package that is deemed by credit market participants the world over to be sufficient to return fiscal solvency to the region's governments -- capital will begin to flow away from the safety of dollar denominated assets in search of higher yielding assets elsewhere. Such an outcome, should it develop, is virtually sure to put increasing amounts of upward pressure on our domestic mortgage interest rates.
Some analysts are suggesting the upcoming summit will be a major defining moment for the European Union and by extension for global economic history. I don't know whether such a dramatic description will likely prove to be accurate or not -- but I do know tension in the global investor community is extremely high and liquidity in the mortgage marketplace is declining as year-end approaches - when combined these conditions ramp up the potential of a period of very "whippy" mortgage interest rate movement ahead. Heads up.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
