Investment Commentary
09/09/2011
In the past week there has been more negative news about the world economies, which in turn has caused high volatility in many markets. The FTSE100 saw a fall of 3.58% on Monday, followed by a rise of 3.14% on Wednesday. These fluctuations occurred off the back of news coming out of America and Europe about the debt crisis. Weak US jobs data started the downward turn at the beginning of the week with America announcing that no new jobs had been added in August, compared with a predicted figure of an additional 70,000 new jobs. Unemployment figures also stayed high at 9.1%, the same as in July. The European Central Bank downgraded its outlook for growth and voted to hold interest rates at 1.5% as well as the Bank of England who voted to keep interest rates at 0.5% and not voted in any further quantitative easing measures, despite inflation remaining high. In a bid to weaken the strength of the Swiss Franc the Swiss National Bank has set a minimum exchange rate of 1.2 Francs to the Euro to try to avoid the value of the Franc being a threat to the Swiss economy.
However, in better news Greece managed to re-finance £1.14bn of debt without calling on the European Financial Stability Fund or from help from France or Germany. The price of gold has also hit a new record this week, with investors attempting to find a safe haven for their money.
Finally, to end the week, President Obama has failed to inspire confidence in world markets despite announcing a $450bn (£282bn) package of tax cuts and spending plans aimed at creating jobs and boosting the economy.
It will be interesting to see the outcome of this weekend’s G7 meeting especially as the International Monetary Fund’s chief Christine Lagarde has urged for "bold action" on the faltering world economy. Also UK inflation figures for August 2011 are due out this Tuesday (13th), which will be another key indicator of the health of the world economy.
12/09/2011
- Moody’s downgrades two French banks - Credit Agricole was cut from Aa1 to Aa2 and Societe Generale from Aa2 to Aa3. A third bank, BNP Paribas, was kept on review for a possible downgrade. (14/09)
- Outcome of G7 meeting – a meeting of G7 finance ministers ended with no specific measures to lift the sagging global economy. (12/09)UK inflation rises to 4.5% (14/09)
- UK Unemployment rises by 80,000 to 2.51million (14/09)
- Italian debt - Italy has about 1.9 trillion Euros of debt and must raise about 70bn Euros by the end of the year (13/09)
- Chief economist of ECB resigns. European Central Bank chief economist Juergen Stark has resigned amid speculation of conflicts within the ECB over its bond-buying programme. (09/09)
Despite these five points the FTSE 100 is up 97 points (1.8%) since Friday’s close as at 10.09 am today! Further evidence that daily sentiment is driving the market, rather than fundamentals.
16/09/2011
Central banks work together to help Europe lenders
The world’s main central banks took bold action to pre-empt a dollar funding crisis in Europe, sparking a rally in Eurozone bank shares and the euro.
Five central banks including the European Central Bank, the Bank of England and Switzerland’s central bank said they would provide three-month dollar loans to banks from October, which will cover the year-end period. The display of firepower was intended to prevent an escalation of financial market tensions and signal that authorities are prepared to take action to boost market confidence.
Within minutes of the announcement, European banking shares led a strong rebound in equity markets.
This morning Barclays, Lloyds TSB and RBS were all up over 3%, with the FTSE100 up another 0.61% on top of yesterdays 2.11% rise.
23/09/2011
Monday
Lloyds bank shares fell sharply due to sudden move by Tim Tookey left to go to Friends Life on Monday
Free Democratic party, who are the junior partner in the German coalition government lost all of their seats in the Berlin regional parliament – which is a very severe weakening of Angela Merkel’s position.
Tuesday
Standard and Poors downgraded Italy – A+ to A
Switzerland downgraded its growth forecast from 2.1% to 1.9% for the current year
Japanese Prime Minister Yoshihiko Noda hinted in a speech that Japan would buy more Eurozone bonds
Wednesday
"Operation Twist" – America’s answer to the economic problems is unveiled. Although no new money is to be created so the impact remains to be seen.
The minutes of the last Bank of England meeting hint that the MPC is looking actively at another round of Quantitative Easing.
Credit Rating Agency Moodys downgraded Bank of America stocks by two notches, from A2 to Baa1, prompting a 2.3% fall in the BoA share price.
Thursday
Markets fell by nearly 5% on Thursday as worries about the state of the world economies after a Federal Reserve warning on Wednesday about the outlook for the US economy and Christine Lagard, head of the IMF said that the world economy was entering a ‘dangerous place’. These falls sparked the G20 to announce a commitment "to take all necessary actions to preserve the stability of banking systems and financial markets as required".
One announcement that was lost in amongst all the turmoil was that the Irish economy grew by 1.6% in the second quarter of 2011, against a forecast of only 0.25%. This followed a 1.9% increase in the first quarter of the year.
The price of Brent Crude Oil fell by $4.71, to $105.65, a fall of 4.25%, while West Texas Crude fell more than 6% on worries for demand due to the global slowdown. It remains to be seen if we see any of those falls in terms of lower petrol prices!
Also, on Thursday, Angela Merkel, the German chancellor, met with the Pope to discuss the financial crisis. Maybe we’ve reached the point where Divine Intervention is the best we can hope for!
Friday
By midday on Friday the FTSE 100 was down 79.66 points, or 1.6%, at 4,961.95 as fears over global growth prospects returned.
Thursday 27th October
Eurozone comes to an agreement ‘crisis plan’ including Private banks holding Greek debt writing off 50% of their returns, which should cut Greece’s debt to around 120% of GDP. Also the European Financial Stability Facility (EFSF) is to be boosted from the 440bn Euros set up earlier this year to 1tn Euros. Finally European banks will be required to raise about 106bn Euros in new capital by June 2012 to boost bank’s capital reserves.
Monday 31st October
Nationwide building society has said that house prices increased year-on-year for the first time in six months in October, with a 0.8% rise. However the markets began to doubt the effectiveness of the EFSF rescue package, which seemed long on rhetoric but short on detail. In addition, rumours abounded surrounding the solvency of MF Global, the futures broker, which finally filed for bankruptcy protection at 2.30pm GMT, pushing the markets further into the red.
Tuesday 1st November
US and European markets have fallen following Monday's announcement of a Greek referendum on the latest aid package to solve its debt crisis. The FTSE100 finished down at 5421.57 down over 2% on the previous day.
Wednesday 2nd November
Greece’s Prime Minister, George Papandreou, has won the backing for a referendum on the second bail-out package. After a 1% rise in the markets in the morning this news has bought the FTSE100 back down to below its opening value on the fear the Greece will now default before a referendum can take place. The FTSE 100 recovered in afternoon trading to end the day up 1.15%, despite ongoing concerns about the impact of Greece's decision to hold a referendum on the Eurozone rescue plan. The main rises came from mining stocks.
30th November 2011
European Central Bank announces coordinated central bank action - Press Release Here
12th December 2011
12/12/11 – UK Prime Minister David Cameron blocked changes to the EU's Lisbon Treaty, which were aimed at addressing the euro crisis. Deputy Prime Minister Nick Clegg has called the decision “bad for Britain”, although opinion polls show a majority are in favour of the move. Stock markets in Europe have opened down this morning after no real action had been taken at the meeting in Brussels.
8/12/11 – Anticipation about the meeting in Europe and the sense that David Cameron wouldn’t agree to a much needed decisive action plan caused the FTSE100 to be down over 1%.
7/12/11 – Treasury announced that pay deals for high earning executives below board level must be disclosed to end the secrecy surrounding the salaries of large bank employees.
5/12/11 – Standard & Poors cause European Stock Markets to remain largely flat after announcing that they were considering downgrading the credit ratings of all but one of the euro zone’s member governments; the exception being Greece which already has an exceptionally low junk rating.
30/11/11 - The Federal Reserve, the US central bank, has cut the cost of supplying dollars to the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank in order to avoid another credit crisis as banks are continually concerned with the difficulty and expense in borrowing dollars. This led to markets around the world ending significantly up; the FTSE100 gained 3.16% that day.
Global Outlook 2012
The Euro Crisis – When Will It End...?
The Eurozone
In the UK, our traditional method of extracting ourselves from a recession has been to devalue the pound. This makes our exports more competitive and therefore increases our income. The one problem with this course of action is that the lower value of Sterling on the international currency markets pushes up inflation domestically; however this usually tends to come after the recovery has started and is therefore less painful that it might be in the middle of a recession.
In the Eurozone the value of the Euro is set and maintained by the European Central Bank and tends to reflect the strength of the German economy, in order to control inflation and maintain its competitiveness. Therefore one individual country cannot devalue their currency to bring themselves out of recession.
The Eurozone Solutions
- 1. Eurozone Break-up and the return of the Deutschmark
The first problem with this solution is that the shockwaves from a break-up of the Euro would be felt, very severely, throughout the world. Although the shockwaves would be comparatively short-lived, they would still be severe, seeing Government debt yields being forced up throughout the world and stock markets possibly crashing to levels lower than we saw at the end of the bursting of the dot com bubble in 2003. Secondly, the main losers in the longer term should the Euro break up would be Germany. Although the value of the Euro is mainly influenced by the strength of the German economy, it is still held back by the weakness of the Greeks, Italians etc. A reintroduction of the Deutschmark would bring an immediate increase of its value against the rest of the world, which in turn would reduce Germany’s competitiveness in worldwide export markets.
- 2. ‘United States of Europe’
There are problems with a closer European Union, even if it does appear to be the preferred solution of Angela Merkel and Nicolas Sarkosy. Firstly, if it is to succeed, it would need the Eurozone to have centrally controlled tax and spending regimes, not merely sending inspectors into the various member states to ascertain whether or not they are breaking the rules. The second problem with this is that it would take time to implement, something that the Euro quite plainly does not have.
- 3. The Middle Ground
One would suspect that the actual final outcome would be somewhere in the middle. The problem currently is that each passing day is pushing Europe closer to a break-up of the single currency, and further away from Fiscal Union. If the Eurozone and, more importantly, its voters, want Fiscal Union, that is something that should be revisited once the current crisis is resolved.
The USA
The situation in the USA is much clearer. Corporate America is waking up and a consumption-led recovery seems to be very likely during 2012. Certain sectors, typically but not always, those requiring a high capital input, tend to lag behind other, more dynamic, less capital-intensive sectors. This is what we are seeing in the USA right now and it is not a particularly worrying trend.
Of more concern is the size of the Federal Reserve Debt, which is actually larger as a percentage of its GDP than that of Ireland, Spain or Portugal. This needs to be brought under control. The ‘elephant in the room’ is the Presidential election next year, which will switch focus away from the US budget deficit
Overall, then, one would expect the US economy to continue to improve, at a gradually increasing speed, during 2012, in the run-up to the presidential election. Although there is, arguably, very little room for manoeuvre from Barack Obama in terms of public spending (the so-called pre-election bribe), he may well at least try to persuade the American people to spend more during the forthcoming year, which will, by its very nature, boost the economy.
China
Finally, will the Chinese economy avoid a hard landing in 2012?
Things are becoming more difficult in China now. The housing boom is easing off. There is much unoccupied office space and exports have been badly affected by the global recession. That said, obviously there is a large, still mostly untapped, internal market that is crying out for inward investment and it may be that this is China’s saviour. Only time will tell with that one. If internal consumption is to take over from exports as the main driver of Chinese growth and if it is to take over smoothly, then the start of the Chinese consumer boom must coincide with the easing of the Chinese export boom. Any other outcome will bring a slowdown in the Chinese economy at some stage, and that could have the effect of triggering a slump in confidence and spending.
Of course, the other, arguably more likely, outcome during 2012 is that the Chinese economy will continue to grow at the same rate that it has for the last 20 years and they see no ill-effects at all. If the US recovery continues to gather pace, then increased demand from China’s main export market will continue to drive the economy forwards at speed.
2011 in a graph:
9th January 2012
Over the Christmas period stock markets made gains all around the world. The FTSE100 saw a 3% rise between Christmas and 3rd January and markets in Asia and America also made reasonable gains.
Tuesday 3rd Jan- Greece announces that their EU Membership may be in jeopardy if they cannot secure the latest bailout. In order to secure the latest bailout they need to approve more austerity measures if they are to receive the money. Public opposition to the new measures, including Doctors striking on 2nd January is not improving the outlook on the situation. Brent crude closed at $112.27 a barrel, up $4.89 on the day, while US crude was up $4.13 to $102.96 showing signs of improvement as hopes for the economy were on the rise.
Wednesday 4th Jan - The Family and Parenting Institute claimed that families with children would be worse off with tax and benefit plans to reduce the deficit. Also the Euro dropped to a 16-month low over bank concerns.
Thursday 5th January – US service sector growth quickens in December, the ADP National Employment Report's December job tally rose by 325,000 - compared to 204,000 in November. UK Service sector was surprisingly buoyant with the purchasing managers' index was 54.0, up from 52.1 in November. Any figure over 50 indicates that the sector is growing.
Friday 6th January – Shell is the last FTSE100 company to close its Final Salary Pension Scheme to new employees. House prices across the UK fell by an average of 1.3% in 2011, mortgage lender Halifax says. A drop of 0.9% in December took the average house price down to £160,063.
27th January 2012
After a mixed week in which it was reported that the UK economy had shrunk by 0.2% in the last three months of 2011, the US economy had grown much quicker in the last quarter and Greece still hadn’t resolved their bailout problems; markets have ended where they began at the beginning of the week (FTSE100 currently at 5734). Although the week hasn’t been without volatility, we haven’t seen a one day movement on the FTSE100 which has been less than 0.5% movement either way.
The US economic data is a good sign, but many economists believe that this surge will be followed by a period of slower growth in 2012. Greece is yet to find an agreement with their creditors to reduce the existing debt to help Greece avoid bankruptcy. The tranche of its bailout aid from the Eurozone and international lenders is desperately required as without which it cannot afford to repay 14.5bn Euros ($19bn; £12.1bn) worth of bonds that are due to be repaid on 20 March.
Market Blog – 3rd February 2012
The National Institute of Economic and Social Research has today released its press release stating that it’s forecasts for growth in the UK Economy mean the UK will technically be in recession at the end of this quarter, after official figures in January showed that the economy shrank by 0.2% in the final three months of 2011. However this doesn’t seem to have affected the FTSE100 today as it is currently floating at around the 5800 mark. The upward trend of the markets this week has been mainly due to improving manufacturing data. In the US, the ISM manufacturing index rose to 54.1, the strongest reading for seven months. A reading above 50 implies expansion.
Also this week the jobless rate in the 17 countries that use the Euro was 10.4% in December, unchanged from November's figure which was revised up from 10.3%. Greece is still struggling to secure an agreement with its lenders to write of 50% of their debt, although it has been said that an agreement is very close.
10th February 2012 – Market Blog
This week we have seen very little day by day movement in the FTSE100, less than 0.5% either way each day. Greece have agreed to a plan of austerity measures in a bid to secure the bailout package but the Eurozone finance ministers have made a series of demands for Greece to get a 130bn euro ($170bn; £110bn) bailout that must be agreed by Sunday. In the UK Barclays has announced a 3% fall in annual profits and has cut its bonus pool in its investment banking division my 32%.
Germany, one of the strongest Eurozone countries, has today announced inflation figures, 2.1%, which are still above target. China’s import and export figures are also down, with fears that any Eurozone crisis could affect the growth of their economy. Finally in India Tata Steel, the largest producer in India, unexpectedly reported a loss for the last three months of 2011, hit by weak demand.
