It was another painful week on markets. In the absence of any clear drivers, the easiest route for prices was down. The S&P 500 Index in the US lost 4.3%, the Eurostoxx 50 lost 4.9% and Emerging Markets lost 6.6%. (Russia lost 12.3%, on low demand as oil fell 4.6%.) The EURUSD continued to edge down. The bright spot was gold, which rose nearly 1% on the week - in last week’s letter we had noted that it was becoming more attractive after a sharp correction.
There is other good news too: Trading volumes were high globally, a sign that we may be entering a new phase of the sell-off.
Markets are reacting to some extreme risks, but so far economic activity doesn’t seem to have collapsed to the extent that equity prices imply. This makes the market look cheap, and at a time when politicians are finally getting serious about putting growth on the agenda.
The path ahead is of course highly uncertain. Will Greece leave the Eurozone? The next election will take place in mid June. None of the political parties wants to leave the single currency. And Europe has expressed willingness to help with growth measures, so behind the rhetoric there is hope for a compromise. But, the EU will not give ground on core concerns, and will implement contingency plans to protect member states from contagion if Greece does go.
The future looks brighter then. We have highlighted many times that the Eurozone needs to have growth on the agenda, and possibly even less stringent austerity conditions. This week there is a European Summit which will consider exactly this point. It is concerning that Spain’s financial reporting is under the spotlight, but even so we could see something of a rebound in the days ahead.
It is unclear whether any price recovery would hold – the technical indicators still look weak. But, I would expect more resistance to falling prices this week. If I’m wrong, and we see further sharp selling, it may be a good opportunity to buy more. Market prices are already reflecting worse outcomes than we might reasonably expect. As before, we would focus on globally exposed and high dividend stocks. There are quality businesses available at low prices.
Best regards,
James
There is other good news too: Trading volumes were high globally, a sign that we may be entering a new phase of the sell-off.
Markets are reacting to some extreme risks, but so far economic activity doesn’t seem to have collapsed to the extent that equity prices imply. This makes the market look cheap, and at a time when politicians are finally getting serious about putting growth on the agenda.
The path ahead is of course highly uncertain. Will Greece leave the Eurozone? The next election will take place in mid June. None of the political parties wants to leave the single currency. And Europe has expressed willingness to help with growth measures, so behind the rhetoric there is hope for a compromise. But, the EU will not give ground on core concerns, and will implement contingency plans to protect member states from contagion if Greece does go.
The future looks brighter then. We have highlighted many times that the Eurozone needs to have growth on the agenda, and possibly even less stringent austerity conditions. This week there is a European Summit which will consider exactly this point. It is concerning that Spain’s financial reporting is under the spotlight, but even so we could see something of a rebound in the days ahead.
It is unclear whether any price recovery would hold – the technical indicators still look weak. But, I would expect more resistance to falling prices this week. If I’m wrong, and we see further sharp selling, it may be a good opportunity to buy more. Market prices are already reflecting worse outcomes than we might reasonably expect. As before, we would focus on globally exposed and high dividend stocks. There are quality businesses available at low prices.
Best regards,
James
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