Every morning we update a table of data on the daily movements in markets, commodities and currencies (if you want a copy let us know and we'll put you on the daily distribution list).
It also now shows the damage that has been done to markets since the beginning of the month: world equities down by 13.2%, the S&P 500 down by 13.4%, Europe -14.5% and Asia Ex-Japan -10.4% (the latter probably understated since we haven’t seen what Asia will do today in reaction to last night’s Wall Street / European sell-off). What it also shows is the big declines in some commodity prices: Brent crude oil now down 11.2% for the month.
The gains have been equally noteworthy: Gold up 5.8% to yet another all time high, the USD index up 1.3% and the US 10 year Treasury yield (remember the downgrade?), down 16.8% to 2.339% (the yield moves inversely to the price, meaning that the 10 year Treasury price has gone up to reflect the “flight to security”).We’ve been saying in the last few months that we agreed with the US Fed’s assessment that the US Economy’s current “soft patch” will improve in the second half of 2011. Obviously that’s now looking (much too) optimistic, even if that argument may have been temporarily helped by the recent fallback in commodity prices which will reduce inflationary pressures worldwide. For Asia and the emerging markets which have been grappling with sharply rising prices over the last 12 months, that’s actually a positive. That’s the good news.
The bad news is not the US debt downgrade.
The bad news is that with markets forcing the “developed” world debt story ever more sharply front and centre in recent weeks and days, the heightened pressure for major austerity programmes being imposed on unwilling governments will mean ongoing and significant public sector spending cuts at a time when private sector spending remains anaemic. Politicians will have no choice but to think about something other than their re-election for a change. Bloodbathing stockmarkets won’t help to boost private sector confidence and encourage either companies or consumers to spend.The likelihood of a renewed recession later this year or in 2012 has just risen several notches from "remote" to "probable".
What could change this negative feedback loop?
Central banks will obviously be reaffirming their plans to keep interest rates down for the foreseeable future. This could mean we won’t see interest rates increasing until well into 2013 and then only if the economy and employment starts recovering materially. Aside from that, it is also clear that the Europeans will be pushed ever more closely into formal fiscal union, whether the Germans like it or not: the ECB’s program of buying Spanish & Italian debt is the latest step in this direction. The alternative is the dismantling of the Euro a prospect which the Germans seem to like even less.
In Asia and Emerging markets, reducing inflation is good news, although any double dip global recession will hurt the trade flows on which Asia is dependent.
So what do we recommend for this month?
I’d like to think that we’re being presented with a good buying opportunity, especially in Asia and EM, especially given the prevailing low level of interest rates: holding cash on a longer – term basis is not an option.
However, now is not yet the time, I think: short-term panic and nervousness could likely mean more short-term weakness until markets reach a level that prices in a Recession. Not good for mental health or sleeping well.
Steve
e-mail: steve.davies@javelinwealth.com
contact: +65 65577186
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