The malaise in May continued into the second week of the month. The MSCI World gave up just over 1% in US dollar terms and investors’ preference for defensive sectors persisted. The dollar continued to rally, as did most government bond markets. Commodities were highly volatile again but ended the week not greatly changed in most cases.
The US reporting season continued to be generally satisfactory and economic data in the developed world were mixed rather than negative. Nevertheless it is clear that in terms of market psychology we are experiencing a pronounced ‘growth off phase’ that could lead to more general selling of equity positions, a repeat of the 2010 pattern
The unresolved questions over Greece, and by implication Portugal, Ireland and Spain, returned to trouble markets. They didn’t drive European equities down as a whole because Germany reported very healthy GDP growth of 1.5% for the first quarter of the year. Even as policymakers meet this week – minus the head of the IMF – to consider the effectiveness of last year’s 110bn euro bailout, they can reflect on Greece’s reported 0.8% growth in GDP in the first quarter, ending a run of four quarters of contraction.
As a whole the Eurozone grew by 0.8%, twice the rate in the US in the first quarter. With Greek ten year bond yields at 15% compared to 3% in Germany, and Ireland and Portugal at 10%, the size of the problem is clear. At the weekend German Finance Minister Wolfgang Schäuble floated the idea of extending the maturities of Greek bonds as a way of easing the country’s debt crisis. Bond holders must agree, otherwise the problem simply reverts to European tax payers.
Despite positive numbers in Europe, it is clear that overall global activity has started to moderate after a powerful and synchronized recovery over the past two years. China reported April CPI last week, which was up 5.3% from a year earlier, slower than March’s 5.4% but ahead of forecasts. Food inflation is slowing.
Chinese industrial production, up 13.4% on a year earlier, was much lower than forecast. Chinese policy tightening is taking effect, combined with high energy costs, and the People’s Bank of China raised reserve requirements again last week. The Reserve Bank of India raised rates as well. Japan added to the picture of slower activity: production fell 15% in March.
However, energy costs are now falling. West Texas Intermediate closed today at $97 compared with just shy of $114 at the end of April. Chinese activity is still positive. Japan is set for a sharp rebound, with disruptions limited to some auto and component production and some specific tech components. The US is sensitive to data on jobs. The important cyclical data this week is the Philly Fed manufacturing survey reporting on Thursday. Markets will also have an eye on trends in initial claims, which have been volatile recently, also reporting on Thursday.
The FOMC minutes are published on Wednesday and will be interesting in the light of Atlanta Fed President Dennis Lockhart’s speech at the weekend, in which he said that monetary policy in the U.S. will be “in transition” over the next two years as long as the economy continues on its gradual growth path with moderate inflation. He added that he expects inflation to converge with the Fed’s objective of 2% or even “a bit less” over the next two years.
In equity markets the key trends in place since the March 2009 bottom have come under pressure in the first four months of 2011. Developed markets have been doing better than emerging markets, while health care stocks (and energy stocks) led the industry groups, and Europe, including the UK, has beaten the United States. German equities are up 13% in dollars this year compared with 6.5% in US equities. The MSCI Health Care sector is up 14%, while Materials are flat this year.
Issued by: Rupert Caldecott, CIO of the Global Asset Allocation Team, Dalton Strategic Partnership LLP, an investment management boutique in London founded in 2003 by the late Andrew Dalton