Markets oscillated over the past week, alternately concerned and relieved at the ongoing fiscal crisis in the Euro zone’s Greek heel, and the wider picture emerging of some positive signs for growth and inflation beyond the weakness seen in recent weeks.
Global equity market indices were unchanged over the week, but this masked significant day-to-day volatility and differences between regions. Asia was positive, the US was unchanged but European equity markets were down. US Treasuries gained further, as did German and French bonds. Crude oil fell further.
Once more headlines and short-term market action were dominated by Greece and threats to the Eurozone and ongoing concerns over global economic growth. After the last two months or so of market declines, the US stock market surged last Tuesday, with NASDAQ up over 2% on the day. Following that night’s news from Greece that Papandreou’s government had survived a vote of no confidence, markets followed through on Wednesday. However, while Asia ended the week positively, North America and Europe gave back quite a lot on Thursday and Friday.
The next milestone in Greece’s struggle to secure euro zone support occurs this week when parliament votes on the austerity package. However, while a successful vote may produce short-term relief for European equity and debt markets, and beyond, the crisis is unlikely to end with this vote. Greece itself, at about 0.5% of global GDP, is not the real threat to global financial markets.
Beyond Greece lie the continuing and unresolved fiscal issues in Ireland and Portugal, and beyond them lie unresolved concerns over the doubtful valuation of real estate overhanging Spain’s banks, and the potentially biggest worry of all, Italy’s debt to GDP ratio of 120%. Last week Moody’s warned Italian banks and two government institutions that they were on watch for a ratings downgrade.
The Governor of the Bank of England, Mervyn King, noted the crisis in Europe posed a threat to UK banks. Spanish ten year bonds yield 5.68% compared to 2.83% for Germany. Italian ten years are at 4.98%.
Despite these fiscal concerns, and some further worrying US unemployment claims data, two pieces of news last week which may be early signals that investor concerns over the persistence of commodity price driven inflation and global economic weakness that are set to abate in the coming months.
First were a series of announcements from China. Premier Wen said China’s top priority is price stability and that inflation will be “firmly under control.” In March he announced the official target was to contain their CPI below 4% per annum. The latest indications are that although this target may be unachievable, with year on year inflation at 5.5% in May. getting under 5% would be enough to reassure markets.
Chinese GDP grew at 9.7% in the first quarter of 2011 but HSBC’s estimate of China’s June PMI was at a lowly reading of 50.1. If growth can be sustained in the 8-9% range, with inflation moderating, the prospect for the rest of the world looks rosier. Emerging Market equities were up over 2% in sterling over the week, with strong gains in China (4%) and Korea (3%) and decent gains in Brazil and India. Japan posted a weekly gain of 4% in sterling.
The second piece of news was the International Energy Agency’s announcement of a release of 60 million barrels from its members’ emergency stockpiles. This is only the third time this has happened in the IEA’s history. The amount of oil is not enormous, but the signal of co-ordinated action is. The decline in oil prices should hasten declines in inflation in the second half.
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