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October 15th, 2012
Market Recap Equity markets moved lower last week with the slower global growth theme
dominating the headlines. Many of the major indices suffered their worst
weekly performance since June. The tech-heavy Nasdaq Composite was among
the worst performers in the U.S., down 2.94%. Core and Peripheral bond yields
both moved lower while the Euro fell back slightly.
Spanish Downgrade – A Good Thing? Standard & Poor’s downgraded Spanish Sovereign debt on Wednesday citing
mounting economic and political risks. The ratings agency lowered its long term
sovereign credit rating on Spain by two notches to BBB- from BBB+ with a
negative outlook. They have also lowered the short term sovereign credit rating
to A-3 from A-2. The longer term negative outlook reflects their view of
“significant risk to Spain’s economic growth and budgetary performance, and
the lack of a clear direction in Eurozone policy”. Market reaction was muted and
in a perverse way it has been viewed as a positive since it could prompt Spain
to ‘submit’ to a Eurozone bailout. Spanish bond yields declined for the week.
IMF Outlook The IMF launch of the 2012 World Economic Outlook kicked off the World
Bank/IMF Annual Meetings in Tokyo last week. Essentially the IMF confirmed
what we already knew - the global recovery has weakened due to fiscal
austerity and a dysfunctional financial system. Despite confirming that fiscal
consolidation is hurting growth, Oliver Bernard, IMF Chief Economist reiterated
in the foreword of the report that “Spain and Italy must follow through with
adjustment plans that re-establish competitiveness and fiscal balance and
maintain growth”. The problem is that no country has been able to maintain
growth while restructuring and deleveraging their economy. The multiplier
effect on GDP of spending cuts and higher taxes, imposed under austerity, has
been greatly underestimated.
Of course it can be argued that the alternative of increasing fiscal spending and
government debt to support domestic demand is just prolonging the inevitable.
This is what we have seen in the U.S. where their debt burden and budget
deficit have ballooned. Their economic recovery has been stronger than in the
UK and Europe, but it has been modest by historical standards. They now face a
‘fiscal cliff’ of expiring Bush-era tax cuts and spending cuts. Outside of the
Eurozone debt crisis this remains the biggest cause for concern for companies
and investors. The most likely scenario is that they kick the can further down
the road, but it has the potential to severely disrupt markets in the short term.
European Union – Nobel Prize Winner 2012 When Barack Obama won the Nobel Peace Prize in 2009, people thought it
strange, a man one year into his U.S. presidency and Commander-in-Chief of
the world’s largest military fighting two wars in Afghanistan and Iraq. The latest
announcement that the European Union has won the Nobel Peace Prize seems
just as strange, if not stranger. While the award to Barack Obama was an
endorsement to promote “international diplomacy”, the 2012 award is a clear
call to European Union leaders to unite and solve the Eurozone debt crisis. The
award is for the advancement of peace over the last six decades but in a way it
says more about the future than the past. For me, it illustrates the real concern
that exists about the future of the European Union and the Euro.
Vincent McCarthy, CFA Senior Investment Consultant Actuarial and Investment www.invesco.ie +353 1 294 7600
Senior Investment Consultant
Actuarial and Investment www.invesco.ie +353 1 294 7600
MACRO & MARKETS WEEKLY Senior Investment Consultant
Actuarial and Investment www.invesco.ie +353 1 294 7600
Market Summary
Equity Indices Value 1Wk YTD
North America DJIA 13328.85 -2.07% 9.10%
NASDAQ Comp 3044.11 -2.94% 16.85%
S&P 500 1428.59 -2.21% 13.60%
Europe FTSE Eurofirst
300 1093.33 -1.65% 9.18%
FTSE 100 5793.32 -1.32% 3.97%
CAC 40 3389.08 -1.97% 7.26%
DAX 7232.49 -2.24% 22.62%
Asia-Pacific NIKKEI 225 8535.12 -3.70% 0.94%
HANG SENG 21136.43 0.59% 14.66%
Gov. Bond Yields Yield 10 YR Wk Chg Yr Chg
Germany 09/22 1.46% -0.05 -0.27
Ireland 10/20 4.73% -0.27 -2.99
U.K. 09/22 1.72% -0.04 -0.54
Japan 09/22 0.77% -0.01 -0.23
USA 08/22 1.66% -0.07 -0.12
Forex Rate 1 Wk YTD
EUR/USD $1.297 -0.69% 0.61%
EUR/GBP $0.806 -0.12% -3.51%
EUR/Yen ¥101.60 -1.17% 1.72%
USD/YEN ¥78.36 -0.43% 1.85%
Commodities Price 1 Wk YTD
WTI Crude Oil $91.86 2.20% -7.05%
Brent Crude Oil $114.62 2.32% 6.74%
Gold 100 Oz $1,768.80 -1.21% 12.38%
Official CB Rates Rate
Euro Refi 0.75% Fed Funds 0.00 - 0.25% UK 0.50% Japan 0.00-0.10%
Source: FT/Reuters
Dublin 2 Sandyford Business Centre, Burtonhall Road, Sandyford, Dublin 18, Ireland tel +353 1 294 7600 fax +353 1 294 7633 Cork 7 Webworks, Eglinton Street, Cork, Ireland tel +353 21 480 8041 fax +353 21 431 0530 Web www.invesco.ie e-mail: [email protected] Invesco Limited is regulated by the Central Bank of Ireland. An analysis of Invesco’s activities between those that are regulated by the Central Bank of Ireland and those that are not is set out on the company’s website www.invesco.ie.
Quote of the Week
No better man to bring the woes of Irish football and our banking system
together in one great quote. Dissecting the failure of Giovanni Trapattoni’s
tenure as National manager, the always entertaining Eamonn Dunphy remarked
“In football all of the mistakes catch up with you. It’s not like being a banker,
you actually pay the price”. The “Anglo Three” will be hoping this will continue
to be the case when they appear before the Dublin Criminal court this week.
Outlook Key macro data for the week ahead includes industrial production data from
the U.S., Japan and China. There is retail sales data due out from the U.S., UK
and China. We have also inflation data due out from the U.S., Europe, UK and
Canada. The third quarter GDP report from China will be keenly watched with
the economy expected to have grown 7.4%. U.S. housing will shed more light
on the strength of the housing market recovery. U.S. initial jobless claims will
be important after the surprise decline last week to 339,000 from 370,000,
albeit with a few caveats. The European Council Summit Thursday and Friday
with the heads of government from the 27 member states has the potential to
cause some market moving headline news. The Troika will be in Dublin this
week reviewing ‘our progress’ as we approach budget time.
The October market correction, which I had been expecting following the
significant rally in the third quarter, has been relatively mild so far. Volatility has
moved up slightly but it remains close to an historic low. Equity markets have
moved lower but we haven’t seen dramatic sell offs, rather a gradual decline
more akin of profit-taking than risk-off behaviour. Peripheral bond yields have
also continued to move lower easing concern about the Eurozone debt crisis.
However, with Greece only six weeks away from running out of money, any
delay in the next tranche of their bailout could lead to increased market
turbulence.
Economic Calendar – Key Events
Indicator Region For
Monday Industrial Production JAPAN Aug
Retail Sales US Sept
NY Empire State Manufacturing US Oct
Tuesday Consumer Price Inflation (CPI) EUR Sept
Consumer Price Inflation (CPI) US Sept
Consumer Price Inflation (CPI) UK Sept
Producer Price Inflation (PPI) UK Sept
Industrial Production US Sept
ZEW Economic Sentiment GER Oct
Wednesday Housing Starts US Aug
Building Permits FR Aug
GDP China Q3
Fixed Asset Investment China Sept
Retail Sales China Sept
Claimant Count UK Sept
MPC Meeting Minutes UK Oct
Thursday Retail Sales UK Sept
Initial Jobless Claims US Week
Friday Existing Home Sales US Sept
Consumer Price Inflation (CPI) CAD Sept
For additional information, or to subscribe to weekly updates, please visit www.invesco.ie