After the poignant anniversary of 9/11 yesterday, those of us at Dalton Strategic Partnership will be joining hundreds of others this afternoon at a memorial service in St Paul’s Cathedral to celebrate the life of DSP’s founder Andrew Dalton. Andrew would have relished the current challenges being presented by investment markets which last week saw a lot of economic policy activity, but a lack of decisive action to resolve the plight of weaker economies or boost faltering economic growth. Investors clearly remain nervous of risk assets, and continue to seek out safer harbours with vigour when concerns emerge.
Europe was once again the focus of attention as investors begin to discount both the political and economic scale of the problem facing the eurozone and the fact that the degree of difficulty for any solution is rising as global growth prospects decline. Greece’s continued struggle to implement measures to cut its deficit and thereby secure the eurozone support package saw its 10 year bond yield close the week at 19. 6% and the European financial sector lead European stock markets down on fears of Greek bond write downs.
Prime Minister Papandreou’s cabinet committed to cutting civil service salaries and dismissing 20,000 public employees in order to secure the next 8bn Euros tranche of its bailout loan. After some earlier interference by Prime Minister Berlusconi, Italy finally passed its second emergency budget, prompting a national strike. But the resolve of the rescuers is also under question.
In Germany the constitutional court may have rejected the legal objection to Germany’s contribution to the Greek rescue plan but they boosted the Bundestag’s supervision of credit guarantees, and Chancellor Merkel’s party took a beating in West Pomeranian regional election.
Elsewhere the strongest governments also got busy. After failing with other measures to halt the inexorable rise of the Swiss Franc against the euro, the Swiss National Bank announced last Monday that it would intervene with unlimited resources (i.e. printing currency) to impose a ceiling of CHF 1.20 versus the euro. The Swiss Franc dropped 8% on the day.
In the United States the focal point of the week was President Obama’s much anticipated speech on jobs, which turned out to be a very clever political moment, exceeding expectations with the headline figure of $450bn and getting his retaliation in early against any attempts by a Republican Congress to block the stimulus. There was also some happier “noise” in the shape of the August ISM survey. The US stock market seemed underwhelmed, closing down a lot on Friday after the speech, allowing European concerns to override any Obama boost.
The global equity market, represented by MSCI’s All Countries World Index was down 1.4% in sterling over the week, with four days of losses interrupted by a sharp rally on Wednesday. Europe ex-UK was down 7% in sterling, with France’s CAC40 down 5.5% and the German DAX down over 6% in Euros. After its currency intervention, Switzerland’s stock market was down over 8% in sterling on the week. The global financial sector was down 3.1%.
The United States, thanks mainly to the impact of Wednesday’s rally, was up in sterling, and in dollars the NASDAQ was only down 0.5% on the week, with the S&P off 1.7%. Bonds in the largest markets were once again strong, with 10 year yields in the US and the UK ending the week at 1.92% and 2.25% respectively. Gold was off modestly over the week, ending at $1,856/oz.
As economic growth falters and activity indicators flicker, concerns with equity markets rest on the resilience of forecast future profits. With global equities at 10 times next year’s profits – and Germany at 7.4 times, and the UK on 8.6 times and yielding 3.8% – investors are much more concerned over the weak momentum in stock markets. They also have concerns about the increasing rate of downgrades to next year’s profits, which has already downgraded by 2% in the past month but still expected to grow 15% year–on-year. The coming quarter could see some significant reductions in this number. The next key policy milestone is the two day FOMC meeting on the 20th.
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