Commentary: Hier kommt die Sonne
“Eins, zwei, drei, vier, fünf
Sechs, sieben, acht, neun, Aus.
Alle warten auf das Licht
Fürchtet euch fürchtet euch nicht
Die Sonne scheint mir aus den Augen
Sie wird heute Nacht nicht untergehen
Und die Welt zählt laut bis zehn”
Rammstein, “Hier kommt die Sonne”
After another dismal week for markets, particularly equity markets and particularly European equity markets, we are all waiting for the light. There is precious little sign of the sun shining on the European policy front, with reports of European commission papers on Eurozone bonds being countered by sharp German rhetoric on the need for fiscal rectitude. There was a poor Bund auction on Wednesday – although in truth these auctions are often disappointing – which sent German yields sharply up to 2.26%. Fear and uncertainty ruled again.
The end game seems to be coming closer, but the risk – which appears to worry the Bundesbank less than many others – is that the catalyst for real action, in the form of a new European treaty incorporating greater fiscal union and thus the capacity to issue Eurozone bonds, will be a final collapse, in the currency, bond and equity markets and in the banking system. In the meantime the ECB has been making purchases of bonds, but still seems unwilling – and unsupported by the Dutch and Germans – to step in and do some real fire fighting.
The euro doesn’t have to collapse for the current situation to lead to disaster for Europe, and possibly the world. The squeeze on money supply, concentrated in the southern high yielders, reflects problems in bank funding, the need to raise capital and the general trend in deleveraging. Continent wide GDP forecasts are probably set for further downgrades. Deleveraging and signs of bank funding strains, coupled with slowing economic activity and a fiscal drag from austerity measures, all produce a very dangerous cocktail.
This week there are bond auctions on Monday in Belgium, about to finally form a coalition government a year and a half after its election, and on Tuesday in Italy. S&P downgraded Belgium’s credit rating on Friday. Tuesday also sees the UK Chancellor’s autumn statement, together with the still relatively novel publication of the independent Office of Budget Responsibility’s revised forecasts for UK GDP.
As with the rest of Europe, the UK’s growth prospects are likely to be downgraded and the deficit target is likely to be pushed out by a year. The UK continues to be able to fund its deficit at historically very low levels. Currently the UK ten year gilt yields just over 2%. Belgium has to pay 4.8% and Italy 6.7%. This makes an enormous difference but the spending constraints which have earned that yield advantage are clearly taking a bite out of the UK’s growth prospects.
Markets remain highly sensitive to news, gossip and surprises. Perhaps markets will once again have dictated the agenda at the next policy events, which are the EU summit on December 9th, which follows the ECB monetary policy meeting on December 8th, when a further rate cut must be odds on.
Elsewhere the United States continues to offer more positive than negative news. The early indications are that retailers had a strong “Black Friday”, with high footfall and estimates of higher spending. Unemployment claims and lay-off announcements were both positive. November non-farm payrolls will be reported this Friday. The negatives are all political. The House budget deficit Super committee formally announced last Tuesday that it had failed to reach a consensus on measures to reduce the deficit. The automatic budget cuts from 2013 are now triggered.
Global equities (represented by the MSCI ACWI in sterling) declined for the second week in a row, down 2.1%, and now down just over 6% in November, erasing much of October’s 6.9% gain. The financial and materials sectors have led the decline, down 9% and 11%, respectively month to date. The UK (down 1%) and US (down less than 2% in sterling) had a better week than the other regions, and month-to-date the US is the best performing region, down less than 3.5% compared with Europe ex-UK down 11%. Commodities fell over the week, with oil off 1%, gold down 2.3% and copper off 5%.
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