Some comments about the markets for the week:
- Markets have started the year very well, and technically the rallies underway ought to be challenged soon, implying a cool off in returns and a possible brief sell-off. We remain bullish expecting the recovery trade to continue; I question its sustainability long-term but it looks strong short-term. If this is the case, any selling is a chance to increase exposure.
- Key events for the week include, the ongoing Greek debt negotiations, the FOMC meeting and the earning season. The European Finance Minister meeting is also of interest.
- Key data include US 4Q11 GDP on Friday, European consumer confidence & PMI, US pending home sales. Much of Asia is closed all week for New Year celebrations.
On Greek debt talks, agreement seems very close, with $200bln worth of bonds to be written down by 70%. This would be a mild positive if it gets approved, as it is enough to sustain hope of a Greek solution, although its long-term durability is unclear. If the deal fails, the markets will turn negative quickly.
The FOMC meeting is the first at which Fed chiefs will announce forecasts of how they expect interest rates to evolve. Our investment team is divided here, but my view is that it will weaken the dollar, at least temporarily. My reasons are that: 1) we know Japan killed its QE driven recoveries by raising rates too early, and 2) there is a lot of fiscal tightening scheduled for 2013 in the US.
For EURUSD, there is a lot of risk ahead of the FOMC news due on Wed. We would definitely consider selling out-of-the-money FX Targets (sell EUR, buy USD) if the rate gets to 1.32, which is the current technical roof. However, if the rate breaks through there, then higher EUR is again possible. Medium- to long-term we are still dollar bulls, but the EUR is still oversold and macro events are likely to dominate implying a wide range of possible outcomes short-term.
There is also a good chance the equity market will be supported if the Fed suggests further delays in rate hikes this week (extending the expected hike date from mid 2013).
The bulk of S&P 500 companies will report this week, watch your favourite names, and the aggregate levels of surprise. Overall, I expect earnings to be neutral for markets. But I am watching Apple and McDonalds with interest this week (both on Tues).
In Europe, the sense that we are getting into a safer zone should continue to support markets, most of the rally of the last week was in financials. If that trend continues through the middle of this week, it may also feed into other sectors that are under-valued. But for now the market continues to worry about recession in the real European economy, which will heal slower than the financial sector.
With the financial markets healing fast, we continue to expect peripheral (ex Greece) bond yields to improve. Mario Monti’s marketing campaign has also been an impressive stimulant of Italian bond demand.
Long-term we are still nervous about the sustainability of the European situation, but short-term there appear to be healthy drivers across the board.
Showing posts with label PSI. Show all posts
Showing posts with label PSI. Show all posts
Monday, January 23, 2012
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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