Market Review 20 September 2011

Where are Jeff Tracy, his five sons, Thunderbirds 1, 2, 3, 4 and 5, and Brains, Tin-Tin and Lady Penelope when you need them?  Investment markets may not be able to call on the power of Supermarionation for relief, but last week saw the early signs of an international rescue attempt as risk assets rallied hard.  Central banks surprised investors on Thursday when they announced they would use their joint muscle to inject US dollar liquidity, aimed at easing funding pressure on eurozone banks.

The global equity market, represented by MSCI’s All Countries World Index, rose strongly over the week, ending 3.6% up in sterling, and closed Friday down just 0.1% for September to date.  Europe ex-UK was strong as a whole, up 4.1% in sterling, with Germany up 8.4%. North America led the way for equity markets, up 6% in sterling, with the NASDAQ in the vanguard. Emerging markets lagged the developed markets, down 0.9% in sterling over the week, with only Brazil of the BRICS in positive territory.  So far in 2011 the MSCI Emerging Markets Index is down 13.9% in sterling compared with the MSCI World Index (of developed markets) down just over 7%.  Bonds in the largest markets eased off slightly in this “risk on” week, with 10 year yields in the US and the UK ending the week at 2.05% and 2.30% respectively. Gold was off modestly over the week, ending at $1,812/oz.

The strong performance of equities in North America came despite a plethora of disappointing economic data releases, and the inevitable political squabbles on how to fund President Obama’s proposed jobs bill.  All eyes are on the start of the two-day FOMC meeting tomorrow, with increasing media speculation that there will be an announcement that the Fed will launch a programme to shift the duration but not the size of its balance sheet, buying longer dated US Treasuries to try and drive down longer term interest rates.  This has been dubbed “Operation Twist” in the media, and there is speculation it may have the equivalent stimulative effect of last year’s “QE2” exercise.

Meanwhile the European dance continued last week with little sign of the music stopping.  Early in the week, markets (for the umpteenth time) drew short-term comfort from the rhetoric of reassurance from Merkel and Sarkozy, with the new head of the IMF, Christine Lagarde suggesting the ECB had “practically infinite resources” to defend the Euro.

There were reminders of the difficult path the eurozone still has to tread, and that rhetoric is more plentiful than decisive policy action. On Thursday the EU Commission issued new GDP projections for the euro zone, with Q3 growth cut from 0.4% to 0.2% and Q4 cut from 0.4% to 0.1%.  The Wall Street Journal quoted Olli Rehn, the commissioner for economic & monetary affairs, saying: “The outlook for the European economy has deteriorated. The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy.”   On Friday the US Treasury Secretary Tim Geithner attended the European Ecofin crisis summit and warned of the “catastrophic risk” of not taking control of the Euro crisis.  The ECB head Jean-Claude Trichet stuck both boots into Geithner, saying Europe “taken as a whole…is probably better than other major advanced economies.”

How frustrating those pesky public markets must be for Jean-Claude.  Meanwhile, on Tracy Island, Jeff is wearing his Hawaiian shirt and waiting for the phone to ring.

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