Notwithstanding our concerns about the increased chances of a technical consolidation or a small correction this week, markets have continued to rise. The primary driver has been expectations of the long-awaited restructuring of Greek debt. Whilst this strong and steady market move is welcome, I am slightly concerned at its failure to consolidate more healthily, after all, as the saying goes: "what goes up also comes down."
The details of the Greek restructuring have been increasingly leaked to the press over the last few days. We are now expecting old bonds to be exchanged for 30yr bonds with a coupon of around 3.6% plus a GDP enhancement, so there would a bonus pay-off if the Greek economy performs better than currently expected.
At today's prices, then, it seems that the Greek restructuring should be full expected, and already accounted for in the market. When it is confirmed, markets might either take the chance to consolidate (for example if the impact on Greek banks is extreme), or continue to move up more slowly (the jump we previously expected is now probably in market prices).
The downside risk is that the market will see through the current European rescue steps and not give the economic union the benefit of the doubt. After all, the Euro Summit continued to focus on fiscal measures, which are negative for growth. Also, (bearing in mind all this austerity) it remains uncertain that even the Greek problem has been addressed with this restructuring, since the European loans and ECB holdings will not be restructured alongside private investor exposure.
So, the European problem is far from resolved, but we believe the ECB's ongoing liquidity campaign serves to reduce the chances of a dramatic collapse of short-term confidence. Hence, we continue to recommend using any declines as a chance to build exposure to risky assets.
In other news, the US Fed has remained a supportive force, which has been welcome news as we receive a mini-flow of less positive data there. Not only has the FOMC extended the period of near-zero interest rates, but in his press conference last week Chairman Ben Bernanke also expressed a readiness to further stimulate the economy unless he sees improvement in growth soon.
Meanwhile, China has reopened cautiously after New Year festivities. Emerging markets are the leading equity group year-to-date (up 11.2% versus 6.1% for Eurostoxx 50 and 4.4% for S&P 500). We remain positive on EM as an asset class, and on China and Brazil in particular. But, global equity markets remain correlated. If Europe or the US consolidates, EM will probably pause too.
Showing posts with label Greek debt restructuring. Show all posts
Showing posts with label Greek debt restructuring. Show all posts
Wednesday, February 1, 2012
Wednesday, January 25, 2012
Market Comment (late) 25 January 2012
Markets improved last night, after several days of low activity caused by ongoing uncertainty about when Greek debt will be written down. The driver that moved markets was the interest rate setting meeting of the US Federal Reserve. At it’s meeting, the Fed did not change interest rates, but it did expand its promise to keep interest rates low for a long time. This move is stimulatory to the US and global economy, and so to risky assets (primarily equities).
Importantly, yesterday’s announcement by the Fed combines with the December liquidity program of the European Central Bank, and the likely February boost to Quantitative Easing in the UK. The developed world’s central banks are fully engaged in stimulating growth, which greatly increases the probability that equity markets will continue to inflate over the coming months.
This is not 2009, prices will not rally so much, nor so easily. We should recall that the Fed’s announcement to keep rates low until late 2014 was already essentially priced into bond markets. That being the case, the immediate impact on all risky assets is less than we might otherwise have witnessed (the dollar weakened but only slightly).
Other US news that we have been watching this week has been corporate earnings, and at the end of the week we will see the US 4Q11 GDP number. That statistic is likely to be disappointing, given how aggressively the Fed has acted today. Earnings have been mixed, less companies have impressed us than usual so far this earnings season. However, Apple’s amazing results, issued on Tuesday, should be a support for the whole technology sector.
Over in Europe, the news on the crucial Greek debt restructuring is slow, the two sides continue to edge toward an agreement, but the process is painfully slow and each day it takes causes more nervousness. We expect negotiations to end in the next week or two, when they do, equity markets will move quickly higher around the world. But before this happens, many investors remain cautious, and failure to reach agreement will cause a sharp sell-off.
It would do all investors well to remember the difficulty they feel about deciding on investments today. Equities are not at their lows, the US market is even near its recent highs. Given the dangers going on – European crisis, weak growth in the US, etc. – the risks investors face are high. If markets continue to rise, as we currently expect them to, then we will look back at this period and talk about what an easy opportunity it was. Making the decision to invest today is less easy.
Ways to invest with controlled risk include: selling put options, which pay bonuses instead of giving automatic equity market exposure; buying dividend paying stocks, which may rally less than highly cyclical companies, but offer less downside risk and pay impressive yields; using stop-losses. In these kinds of markets, it is important to be ready to change your investment stance quickly.
Importantly, yesterday’s announcement by the Fed combines with the December liquidity program of the European Central Bank, and the likely February boost to Quantitative Easing in the UK. The developed world’s central banks are fully engaged in stimulating growth, which greatly increases the probability that equity markets will continue to inflate over the coming months.
This is not 2009, prices will not rally so much, nor so easily. We should recall that the Fed’s announcement to keep rates low until late 2014 was already essentially priced into bond markets. That being the case, the immediate impact on all risky assets is less than we might otherwise have witnessed (the dollar weakened but only slightly).
Other US news that we have been watching this week has been corporate earnings, and at the end of the week we will see the US 4Q11 GDP number. That statistic is likely to be disappointing, given how aggressively the Fed has acted today. Earnings have been mixed, less companies have impressed us than usual so far this earnings season. However, Apple’s amazing results, issued on Tuesday, should be a support for the whole technology sector.
Over in Europe, the news on the crucial Greek debt restructuring is slow, the two sides continue to edge toward an agreement, but the process is painfully slow and each day it takes causes more nervousness. We expect negotiations to end in the next week or two, when they do, equity markets will move quickly higher around the world. But before this happens, many investors remain cautious, and failure to reach agreement will cause a sharp sell-off.
It would do all investors well to remember the difficulty they feel about deciding on investments today. Equities are not at their lows, the US market is even near its recent highs. Given the dangers going on – European crisis, weak growth in the US, etc. – the risks investors face are high. If markets continue to rise, as we currently expect them to, then we will look back at this period and talk about what an easy opportunity it was. Making the decision to invest today is less easy.
Ways to invest with controlled risk include: selling put options, which pay bonuses instead of giving automatic equity market exposure; buying dividend paying stocks, which may rally less than highly cyclical companies, but offer less downside risk and pay impressive yields; using stop-losses. In these kinds of markets, it is important to be ready to change your investment stance quickly.
Thursday, January 12, 2012
Market Comment 12 January 2012
Markets have been relatively stable since our last letter, once again highlighting that economic fundamentals and market prices can diverge substantially.
For much of last year, there was good reason to expect constructive actions on Europe, but equity markets plunged. Then, in December European policy makers announced austerity plans that are at best a substantial long-term drag on growth, highlighting that Europe is locked into a downward cycle, and markets respond positively. What is going on?
Markets seem to be doing well for several reasons:
1. The US economic performance has beaten consensus and shows signs of healthy sustainable expansion. The growth trajectory is less of a surprise for this analyst, and represents the long, slow growth path that we have long expected. But investors have been positively surprised, and the US remains the world’s largest single-nation economy, so its growth makes a global difference.
2. Emerging markets globally are looking more interesting. It is important to look at each country individually, but overall the emerging universe is positioned to more aggressively stimulate growth this year as inflation fighting becomes less of a priority.
3. Europe appears to have moved away from the immediate precipice. During 4Q11, Europe moved into an acute phase of economic decline, as credit markets froze over political inaction. Whilst the political process remains painfully dormant, the ECB’s commitment of unlimited funding has provided healthy support in times of market stress, and eased real economy financing concerns. Meanwhile, there is tentative progress toward a write-down of Greek debt.
If Greece is able to secure a material write-down of its debt, then some corners of the European financial system will face some challenges (think Greek financial institutions). However, at the aggregate level, the news will be of huge significance. It is entirely possible that a Greek debt write-down will lead investors to realise that Italian and Spanish economies are materially different (still fighting liquidity not solvency issues). The resulting wave of confidence may drive asset prices for the medium term. Of course, Europe’s growth problems will remain as a long-term issue, hence we would not rule out that the crisis might return at a later date. And, importantly, such an optimistic outlook assumes that the write-down of debt is sufficient to create a hope of future sustainability.
But, the current movement in the market may be justified, if such a write-down is achieved. After so many disappointments, it would be wrong to trust that Europe is about to get it right, but the case for short-term risks, such as Equity Target products, looks reasonable today.
Best regards,
For much of last year, there was good reason to expect constructive actions on Europe, but equity markets plunged. Then, in December European policy makers announced austerity plans that are at best a substantial long-term drag on growth, highlighting that Europe is locked into a downward cycle, and markets respond positively. What is going on?
Markets seem to be doing well for several reasons:
1. The US economic performance has beaten consensus and shows signs of healthy sustainable expansion. The growth trajectory is less of a surprise for this analyst, and represents the long, slow growth path that we have long expected. But investors have been positively surprised, and the US remains the world’s largest single-nation economy, so its growth makes a global difference.
2. Emerging markets globally are looking more interesting. It is important to look at each country individually, but overall the emerging universe is positioned to more aggressively stimulate growth this year as inflation fighting becomes less of a priority.
3. Europe appears to have moved away from the immediate precipice. During 4Q11, Europe moved into an acute phase of economic decline, as credit markets froze over political inaction. Whilst the political process remains painfully dormant, the ECB’s commitment of unlimited funding has provided healthy support in times of market stress, and eased real economy financing concerns. Meanwhile, there is tentative progress toward a write-down of Greek debt.
If Greece is able to secure a material write-down of its debt, then some corners of the European financial system will face some challenges (think Greek financial institutions). However, at the aggregate level, the news will be of huge significance. It is entirely possible that a Greek debt write-down will lead investors to realise that Italian and Spanish economies are materially different (still fighting liquidity not solvency issues). The resulting wave of confidence may drive asset prices for the medium term. Of course, Europe’s growth problems will remain as a long-term issue, hence we would not rule out that the crisis might return at a later date. And, importantly, such an optimistic outlook assumes that the write-down of debt is sufficient to create a hope of future sustainability.
But, the current movement in the market may be justified, if such a write-down is achieved. After so many disappointments, it would be wrong to trust that Europe is about to get it right, but the case for short-term risks, such as Equity Target products, looks reasonable today.
Best regards,
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