Market Review 18 October 2011

Commentary: Schrodinger’s Cat

Are the equity markets half dead or half alive?  Or, as with Schrodinger’s cat, both at the same time? The second week of October extended the rally in equity markets and other “risk on” assets from the lows at the end of September.  On the week the MSCI All Countries Index (ACWI) was up 4.2% in sterling, led by the developed markets, in particular Europe ex-UK (up 5.2%) and Latin America (up 5.9%),  with strong returns from the Energy, Materials and IT sectors.

Japan is now the laggard, down 0.8% in sterling.  Bonds eased off once again, with the US 10 year yielding 2.25%, up from 2.08% a week ago, and up from 1.91% at the start of the month.  Commodities were positive once again.  Oil (WTI) was up just under 5% and copper was up 4%.

Markets have rallied very strongly from deeply oversold levels.  The ACWI is up 5.9% so far this month but still down 7.6% in 2011.  The S&P is up 8% in dollars in October, the NASDAQ bettering that at 10.5% and the DAX up 8.5% in Euros.  The prospect, once again, of a solution to the eurozone crisis and the absence of nasty surprises has reassured investors, and worried those who don’t own, or who are short of, European financial stocks. The outlook for the United States improved with further encouraging data on retail sales and unemployment claims.

In Europe Slovakia eventually approved the EFSF changes on Thursday and the international “troika” representatives in Greece approved the release of the 8 billion Euros funding tranche that keeps Greece afloat.  The euro zone’s “big plan” is now labelled the “grand plan” by the media, and is rumoured to be a “big bang” grand plan.  The next three weeks will likely see a hiatus in bad news and increasing anticipation from investors as last weekend’s meeting of G20 finance ministers’ rolls into this week’s meeting between Merkel and Sarkozy, then next weekend’s EU summit – when the member states are set to agree the “grand plan”.

And finally all is planned to be unveiled at the Cannes G20 meeting on the weekend of 3rd/4th November.  Investors may well be suffering from crisis exhaustion.  As long as it is clear the EU will act to protect the banking system and ring fence Greece, any deeper concerns about the mechanics of the plan and the longer term (2012) implications for eurozone growth will be overlooked and a rally sustained.

It may take some time for a recalibration of expectations, switching from the fear of a permanent loss of value caused by Greek default and banking write downs, to the increased uncertainty of future returns.

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