Markets, 10 April 2012

Sorry for the hiatus, vacations!

The market has been trading in line with our expectations, and consolidation has turned into something of a correction on lower-than-expected employment data from the US.

In the short-term, the selling might continue, especially as Spain concerns play into the equation too. However, I stop short of seeing a full-scale correction here. The US market should be supported by either better data (as I believe the recovery is intact) or renewed expectations of support from the FOMC. Both are realistic probabilities.

As for Spain, it remains a concern. However the issue is less solvency, rather market worries about Europe’s policy for dealing with the crisis (I have previously noted that austerity during a recession is a risky prospect). The reality is that Spain’s government debt load is nothing like so high as that of Greece (circa 80% at this time). The bulk of Spain’s debt lies in the private sector, including among corporates. This debt can be more easily managed by the market. That in the financial sector (regional savings banks) is being managed by the ECB.

On the plus side, Spain has achieved many reforms already, and is in the lag between implementation and demonstrating improvement. Furthermore, the nation is really not in such a catastrophic condition: For example, house prices in Valencia have continued to rise throughout the crisis.

However, for clients fearing a return of the European crisis, I recommend a short euro position. If Spain becomes a systemic issue, then the dollar will certainly rally against the euro, this risk can be profited from through FX options or structured products.

I am also looking at international currency bond portfolios, for those worried about the future of both the euro and the dollar. This portfolio might also be interesting for clients who are concerned that the gold sell-off will continue (assuming that gold was purchased as an alternative to euro and dollar exposure).

On the markets this week, there is little expected by way of major economic data (European Industrial Production, Thurs; US CPI Fri). On the EM side, there is China GDP due out on Friday, along with Brazilian Retail Sales. Indian Industrial Production is on Thurs.

Also, we start the US Earnings Season with numbers from Alcoa and JPMorgan. Consensus is still rather high for earnings, with strategists looking for 1Q12 S&P 500 earnings 21% up year-on-year. Whilst this may be optimistic, it seems early for a definitive sell-off and as noted, the Federal Reserve is now very actively managing market expectations about further easing. It will likely move fast in the face of a significant market break down. With this in mind, I continue to look at buying quality conviction stocks as the market weakens.

Best regards,

James