Weekly Commentary on Financial Markets:
9 January 2012
by Jacob H Schmidt
Markets in Honeymoon Mood
News of the week: major equity markets up in first week of trading; European banks under pressure; US economy in recovery
Europe – Euro
The European saga continues: higher yields of both the periphery and the core countries (Austria, France) due to downgrading and refinancing fears. In addition the message from politicians is mixed. On the one hand no one really questions the Euro and the EU, on the other hand the commitments are slow and weak. More summits can be expected. The markets are impatient and many observers seem to lack a proper understanding of continental European decision making. We believe that the horror scenarios of a breakup of the Euro are exaggerated, but progress will be slow (the European way) and minor changes in the Euro currency possible. It is obvious that the ECB will have a bigger role, as the EFSF has not been able to raise sufficient funds and might suffer itself from a downgrade of France. The result will be slow growth and continuous instability, but no break up. Most Europeans are willing to pay a higher economic price rather than risking political instability or war.
My Grade: C-
Downgraded to junk after a new act which could threaten the central bank’s independence was passed by parliament. Hungary which needs another bail-out package, likely to come from the IMF, is on a more nationalistic course and at odds with the EU and international community.
My Grade: C-
No news, but rumours that the write-off will be in the 70-80% range. At the current price levels of around 20 for Greek GGB these bonds are fully valued, but such a heavy discount would help Greece out of the crisis.
My Grade: C-
BTPs oscillating around the magic 7%. The refinancing of Euro 300 b is the main point here, and at 7% this is expensive, but better than a shameful IMF package. We believe that there is enough wealth in Italy and the country cannot be compared to Greece or the other smaller PIIGS.
My Grade: B
It seems as if the US are in a recovery mode: better pay roll numbers, a lower unemployment rate and in general better macro data point towards a small growth. The other main issue are the elections, and with zero interest rates we could indeed see a recovery. Question is whether the US can decouple from Europe and China, which is the other big question mark.
My Grade: B+
Banks continue to be the main focus, with Italian and French banks under pressure. European banks do not trust each other and prefer to lend to the ECB. Other financials will also continue to suffer, while consumer and electronics depend on the US growth. We continue to be critical of the social media IPO frenzy. In general better numbers from US companies, mixed results in Europe. US stocks preferred over European.
My Grade: B-
Positive start of the year. The equity markets are in honeymoon mood, but question is for how long. US equities could continue to drive the other markets up, or even decouple. Question is whether hedge funds will continue to use S&P futures for the hedging of illiquid positions and other markets.
My Grade: B+
US Notes and Bonds’ prices off, with higher yields (UST 10 Y at 1.96%, 30Y at 3.02%). German bunds unchanged, 10 Y yields at 1.85%. A recovery in the US could push rates much higher. My Grade: C-
French and Austrian government bonds under pressure. Risk of an immediate downgrade from AAA. My Grade: C+
Gold, Silver sold off at the end of the year, to rally again and sell off at the end of last week. Gold and Silver seem to trade without direction, in a wide trading range. My Grade: C
Volatility: VIX at 20%. Looking relatively cheap.
2011 was a bad year for the industry, with an average performance of -4%, but also a lot of dispersion. We reviewed all major European hedge funds of funds and are preparing a report on the different providers and funds. To be released in the next few days.
My Grade: B-
Positive vibes from the US, negative vibes from Europe. BRICs mixed. The major themes to watch in 2012:
1. China – soft or hard landing
2. US recovery
3. US elections
4. Russian elections
5. Geopolitical instability in MENA
6. European banks
7. European debt crisis
8. Valuations of social media stocks
9. Commodity prices as an independent source of risk
10. Greece restructuring as a benchmark for future European cases
The markets will focus on these issues, switching from topic to topic as news break. No easy market for investor.
Gloom in Europe and hope of a recovery in the US will offer great opportunities. Substantial risk of dislocations will arise again similar to the ones in 2011. My grade: C
This commentary is for information only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. It is not an invitation to buy, sell or subscribe and is by way of information only.