Market Comment 12 March 2012

Markets continue to sit around their high technical resistance levels, lacking the drivers to either break through positively, or correct decisively. The Greek restructuring contributed to nervousness at the margin, but appears to have passed off smoothly.

In the last week, the data were mostly positive, with US employment slightly exceeding expectations, economic activity data were also arguably positive on balance. However, markets ended the week flat or slightly down, reflecting that we need a clearer driver to carry the market higher.

For now, we continue to see positive correlations in the price movements of oil, equities and the euro. In the view of this analyst, oil and the euro will likely remain correlated because high prices lead to reserve accumulation and subsequent diversification out of dollars into euros. The correlation between equities and oil is less obvious. Not least because we have repeatedly seen how higher energy costs contribute to economic slowdowns in recent years.

For now, oil remains well supported for geopolitical reasons. But it is less than certain that demand can hold up with these local currency prices (oil is above 2007 levels in euros, rupees and several other key currencies). If the Iran issue can move away from the headlines, even temporarily, then there is a chance for oil prices to cool down. Such a move would contribute to better equity fundamentals. Otherwise, we would need to see stronger demand growth to reassure that these price levels are not harming growth.

Elsewhere, much is now resolved in the Greek story, with the restructuring agreed, the credit event reported and European leaders about to release new capital. Certainly, Greece still faces a struggle. But, it will take many months before we can understand whether their internal restructuring is yielding enough progress. In the near term, we could expect some nervousness about contagion (to countries like Portugal) but there is reason to hope that contagion will be minimal, and the recent more stable European trend will continue.

In the emerging world, there are also some concerns as China pursues lower growth, Brazil recently slashed its interest rates, implying stress there (reflected in extremely high real interest rates). This is not to suggest a crisis in the emerging market world. We remain +1 on EM, and with good reason. But, short-term uncertainty has the potential to provide better entry points. In Russia, things look better as government policies have a chance to moderately improve the risk profile and improve dividend payouts. The price of oil is of course both a support (today) and a concern (looking forward).

I am cautious about moving on markets at this time, as prices remain attractive but the possibility of continued near-term weakness might give better prices for buying. On the other hand, if we do see a strong positive break out, it will certainly be necessary to reverse that view and add to risk exposure.

Best regards