Market Review 14 February 2012

Commentary: Agree With You, The Council Does

“Turmoil has engulfed the
Galactic Republic. The taxation
of trade routes to outlying star
systems is in dispute.

Hoping to resolve the matter
with a blockade of deadly
battleships, the greedy Trade
Federation has stopped all
shipping to the small planet
of Naboo.

While the congress of the
Republic endlessly debates
this alarming chain of events,
the Supreme Chancellor has
secretly dispatched two Jedi
Knights, the guardians of
peace and justice in the
galaxy, to settle the conflict…”

Opening crawl of Star Wars Episode I: The Phantom Menace

In the week that the 3D version of The Phantom Menace landed in cinemas to “tax” Star Wars fans for their love of the franchise, there was no sign of any Jedi Knights at last week’s euro summit or Greek parliamentary debate.  But on deadline Sunday the Greek parliament voted, amidst blazing buildings and civil unrest, to swallow a bitter austerity pill and avert a greedy trade federation (the eurozone) threat to stop all shipping (a 130bn euro bailout) by March 20th.

The desperate dilemma facing Greek politicians was clear in the latest data released last week: the unemployment rate rose in November to 20.9%, a record high, while Greek industrial production fell 11.3% in December compared with a year ago.  The Greek economy is shrinking more rapidly than anticipated.  In December, according to Bloomberg, the IMF forecast a contraction of 3%.  In the latest negotiations this year’s contraction is now forecast to be between 4% and 5%.

Over the week global equities, as represented by the sterling return on the MSCI World Index, were flat, with the MSCI Emerging Markets index down 0.2%.  These flattish outcomes represent a pause for breath after a brisk start to the year by equity markets, and disguise quite significant moves in individual markets over the week, exacerbated by currency movements.  The yen weakened against the dollar, and both the dollar and the euro gained against the pound.

The stock markets of the commodity economies were off last week, with Australia -1.5%, Brazil -2.2%, Canada -1.6%, Russia -2.1% and South Africa -1.9% (all in sterling). Unsurprisingly the MSCI ACWI Materials sector was the worst performer, down 1.6%, with the IT sector the best performer at +1.4%.  Overall Asia and Europe were the most positive regions.  The yield on the ten year US Treasury rose 8bps over the week.

The pause highlights the current tension in markets.  Investors are caught between an equity market rally – on the lookout for supporting evidence and substantial asset reallocation flows – and the protection of government bonds from the impact on stocks of future slumps in economic activity as deleveraging austerity bites.  However the imminent agreement by private sector investors in Greek government bonds to accept a “swap” (aka a write down) is a painful reminder that not all government bond markets are risk free.

Whilst the United States continued to produce positive economic data points (declining unemployment claims in the first week of February), the delicacy of the situation elsewhere in the developed world was underlined by the Bank of England’s announcement of a further £50bn of quantitative easing, followed today by the Bank of Japan’s surprising extension of its asset purchase programme.

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