Market Review 5 July 2011

On the back of improved economic data from the US and the approval of austerity measures by the Greek parliament, the final week of June brought some much needed relief for equity investors. Indeed the US and UK markets managed a rise in excess of 5% with Europe not far behind; Asian markets did less well but were still firmly in positive territory.  It was the best week for global equity markets since mid 2009.

In contrast to the above government bond markets had a poor week.  In particular US treasuries were no longer the beneficiaries of safe haven demand and declined significantly; moreover new debt auctions were not very well received.

There is something rather unreal about observing the manoeuvres surrounding the Greek debt crisis.  Developments last week surely just served to put off the evil day.  One can see from the streets of Athens, or indeed London, that the developed West lives in an ‘age of entitlement’ – a ruder awakening awaits. 

Although European Finance Ministers have now approved the €8.7bn aid payment, ensuring Greece will not default on its sovereign bonds this month, they have so far failed to agree on a new €120bn bail-out package.  Another round of negotiations is expected to focus on the level of bondholder participation when the Finance Ministers meet again, on July 11th in Brussels.

The week closed with the release of US ISM index which was interpreted favourably.  We note, however, that a significant part of the improvement was due to increased inventories. The week ahead will reveal the second batch of key activity data with the service sector and non-manufacturing surveys due on Wednesday, as well as US payrolls on Friday. 

The Chinese non-manufacturing PMI was released over the weekend, showing a decline from 61.9 to 57.0.  Markets have shrugged this off, and Chinese stocks in particular have rallied strongly in the past week.

Some attention has now swung to the impasse in the United States over raising the federal debt ceiling.  Congressional leaders are working to strike a deal before August 2nd when the Treasury says the US will default unless they raise the limit.

Currency markets were dominated by the euro.  With the Greek situation ‘ improved’ and the expectation of an interest rate rise, the currency rose sharply, particularly against the safe haven currencies of the dollar and Swiss franc.

With growth worries diminishing, commodity prices generally hardened but in the improved environment gold made no headway.

It would be ironic if just as some of the ‘big picture’ concerns may be starting to ease, corporate results become less favourable – we are seeing some significant downward revisions in Europe.  The forthcoming US reporting season will be crucial in determining the direction of markets.

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