There is little that can be said of last week that could not have been said of the immediately preceding weeks. Market concerns were the same, as were their direction. Equity markets surrendered around 2% whilst bond funds saw record inflows.
At the time of writing the MSCI All Countries World Index is down a remarkable 4.6% in US dollar terms month-to-date. To put this decline in context, the Index is now down 6.4% in the six weeks from its peak at the start of May, which itself merely represented a recovery to the level reached in mid-February before the Japanese earthquake.
The last significant period of investor concern over the scale and direction of global economic growth, prompted by European credit concerns, occurred in April 2010, just over a year ago. When the MSCI ACWI started to recover in early July 2010 it had fallen 12.7% in twelve weeks.
Once again neither central bank pronouncements nor economic data were helpful. Bernanke appeared to rule out any further quantitative easing and Trichet hinted at a rate rise. Germany announced a drop in industrial production in April and China disappointing trade data. There are again key economic releases in both the US and China this week which may give more indication as to whether the recent soft data is temporary or of a more worrying trend.
The announcement of US retail sales and inflation for May on Tuesday and Wednesday, as well as housing starts on Thursday and will be watched closely. There has been some good news for the US consumer as gasoline prices declined 7 cents during the week, and are now down 28 cents over five weeks. They had risen over $1 from December to May. However the OPEC meeting confounded expectations that supply would be increased and Brent Crude jumped over 3% over the week.
Whilst sentiment in equity markets is truly dark, it isy expect them to muddle through with only moderate downside from current levels (an improvement on this time last year).
The key to future direction may be the US reporting season which begins in mid July. Our US team is not pessimistic. ISI reported that as of Friday, US brokers’ analysts still expected a +14.5% year-on-year increase in S&P earnings in 2Q, according to First Call. If bonds rally further equities may begin to look relatively attractive, deeply out of favour or not.
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