Market Comment 4 June 2012

Our optimism was clearly misplaced last week. The S&P 500 index lost 3.0%, while the Eurostoxx 50 lost 4.3%, and the euro fell another 0.7% against the dollar, but in fact had fallen considerably lower before rebounding on weak US jobs data: As expectations increase of further stimulatory activity in the US, so the one-way trend to sell euros will lessen.

The story was more cheerful in gold, which climbed 3.2%. The precious metal is behaving very much as it has done in previous crises: first it sells down hard, denying safe-haven perceptions, then it climbs back. Whether this gold rally continues depends what phase of current crisis we are actually in. Oil also had a bad week, losing a stunning 7.9%. This sharp fall was to be expected as the world has been oversupplied for an extended period. With Brent below $100/bbl, Saudi Arabia should move toward reducing production, but oversupply going into a crisis is a volatile mix. I would not be surprised to see oil go lower before it stabilises.

So what might we next expect? Looking at both technical indicators and historical experience, it would be premature to look for equity market improvement this week. Technical thresholds have been breached, and as with last year, there is clearly a danger that the market will continue to decline for a more extended period.

Markets are increasingly ready for Greece to exit the euro. Although many expect this to cause a potential credit freeze (a so-called “Lehman Brothers event”), we are less pessimistic. The bankruptcy of Lehman Brothers caused a shock because it was widely viewed as an impossibility, so no one was prepared for it. The market has had time to prepare for Greece’s exit. Volatility would still occur, but if the contagion can be contained, then there is a chance this event could prove a page-turner (bringing an end to several immediate crisis issues).

For now, the US and Emerging Markets are both suffering from the nervousness unleashed by Europe’s woes. But, both are sustaining positive, if weaker economic growth. Europe continues to move too slowly, but soon global weakness will weigh on German growth, encouraging it to push for more immediate resolution. Meanwhile, the adjustment process continues.

Gold continues to offer value, and we continue to favour emerging markets. Globally, corporate performances remain far healthier than macro statistics. Dividend stocks continue to offer stable incomes and high longer-term potential.

Best regards,

James Beadle