Summer time out

The surprise is that it's a surprise. The "news" that Greece is having trouble meeting its punishing commitments for spending cuts and tax increases is a fact that was obvious before the ink was dry on the various agreements with the EU, ECB and IMF. Ireland's no better off, whilst the Portuguese and the Belgians don't have a real government so no-one knows what's going on.

The shrill protestations from the ECB that Greece will not be allowed to default or reschedule look equally unsustainable: the Greeks can't pay (because, as the UK Labour Party's outgoing head of the Treasury said in a note to his successor last year: "there's no money left").

As we've said before, the end result of the Greek fiasco will inevitably be some sort of EU fudge - the latest possible wheeze being that instead of calling it "default" or "rescheduling", the new term will be "re-profiling": As BusinessWeek points out this week, that's the Eurospeak equivalent of referring to murder as "terminating with extreme prejudice".

In broad terms, it just looks as though it's Europe's turn to come under the spotlight for a while, and that's the reason for the Euro falling by nearly 5% against the USD this month. The US is hardly in better shape, and neither is the UK, or Japan, but the major currencies can't all be weak at the same time, even though, in isolation there are compelling reasons why they should.

What does this mean for markets over a hot and bothered summer?

The US markets are down about 3% or so this month so far, whilst in Europe the figure is about 6.5% (half of that is attributable to the fall in the EUR), and Asia is down 5% or so. The headline falls in commodities this month have been led by silver (-21%) and oil (-9%), although of late these seem to have stabilised. I was at a seminar yesterday where some bank strategist again talked about Asian markets "de-coupling". Obviously he hasn't registered the fact that the markets are inconveniently doing the complete opposite - correlation is alive and well (Asia remains the high beta market play).

Our sense is that the Eurozone crisis will continue bubbling away with markets continuing to speculate about the Greek problems (not for nothing did Virgil have the Trojans coining the phrase "beware of Greeks bearing gifts...") and the probability of a default which won't be called that. As before, ultimately, the Europeans will fudge the issue and likely change the rules so that the impact of the "not a default" will be more limited than the rules currently allow for. Once that's dealt with, then the spotlight will move on and markets should see a gradual recovery.

In general terms, even though the headline rates of GDP growth still look anemic (the robustness of the German economy providing the obvious exception), corporate earnings still seem to be coming in above expectations. Interest rates still seem likely to be held at low levels, particularly so as the effect of commodity price rises and tax increases (VAT was pushed up by 2.5% in the UK at the start of 2011), begin to fade away from the year ago comparisons.

Easing inflation should be good news for markets generally, with some such as India and China beginning to look more attractive as and when those inflationary pressures begin to ease. In the developed markets, we still favour the US. We have been underweight Europe for a long time, and there remain good reasons for being so. Having said that Germany remains attractive particularly if the Euro continues to fall back: at that point (say around the $1.30 level on the USD) not only does the market look interesting, but foreign investors also can gain on a recovery in the currency.

Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577185
website: http://www.javelinwealth.com
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