Il Primo Ministro greco Lucas Papademos riceve l'approvazione del governo su tagli al bilancio che corrispondono al 7% del Pil nei prossimi tre anni e su una ristrutturazione finalizzata a ridurre di €100 mld gli oltre €200 mld di debito detenuto dai creditori privati, atteso il voto del parlamento • Standard & Poor's declassa il merito creditizio di 34 banche italiane tra cui UniCredit a BBB+ da A, Intesa Sanpaolo a BBB+ da A e Banca Monte dei Paschi di Siena a BBB da BBB+, S&P anticipa "una redditività decisamente debole per le banche italiane nei prossimi anni" • La produzione industriale italiana aumenta a dicembre +1,4% da novembre +0,3%, oltre le stime degli economisti +0,5%, anche se i dati del quarto trimestre -2,1% suggeriscono che la terza economia della zona euro è entrata nella seconda recessione dal 2009 • I Btp decennali salgono per la quinta settimana consecutiva, il periodo di recupero più lungo in oltre cinque anni, la prossima settimana il Tesoro vende €4 mld di buoni al 6% con scadenza 2014 • L'euro cala dal massimo di due mesi contro il dollaro, il mercato azionario europeo cala dal massimo di sei settimane e l'azionario Usa registra la prima settimana di perdite del 2012 dopo che i ministri delle finanze europee non hanno concesso il pacchetto di aiuto necessario a prevenire il collasso economico della Grecia

lunedì 8 agosto 2011

Market Comment - August 8

(Marco Bonelli) US rating downgrade versus European QE1? - Liquidity and sentiment versus fundamentals?


Let's quickly touch on the rating downgrade as it appears that most comments embrace the call, that the S&P action won't have any direct material effect on rates, the economy or also the status of the United States. Most statements also refer to the fact that it was well advertised and as a result somewhat expected.  The important word here probably is "direct effect". How about the indirect effect? I'd like to mention three points:

Ø  It does have some meaning when the debt of the largest and most powerful economy in the world gets downgraded, so the symbolic effect is huge!

Ø  As this never happened before in the history, all comments and all referrals to other countries is pure speculation as nobody knows for sure what it means for the economy and interest rates!

Ø  Therefore the rating downgrade will have some effect on the already fragile business and consumer sentiment simply due to uncertainty, confusion and fear!

Up until Friday night, the outlook for this week looked interesting with a slightly positive bias. The July employment report was a touch better than feared (although it was a confirmation of a slow growth environment). After a better opening, another sell-off turned sentiment and the market picture considerably. This time, some of the selling clearly had the "panic" stamp on it, the sell-off was once again very broad-based, there was also some talk about various retail orders and the C-Word (Crash) was mentioned quite often. Then came the ECB, stocks turned but throughout the day, there was skepticism about the sustainability of the rebound and doubt of the ECB buying Italian and Spanish bonds. So bottom-line, sentiment became and remained mostly negative throughout the day, a good base for a market rebound.

In addition to that some major indexes came fairly close to the calculated down-side target resulting from the head-and-shoulder formation. The SPX hit a low at 1168, 18 points shy of the 1150 target and the VGY came even 3 points close to the 320 target, while the Dow Jones needed another 289 downside to reach its 10850 target. As you rarely get the perfect picture (although the chart formation was almost perfect), the mentioned negative sentiment could have lead to some contrarian buying, even without the news from Europe. With the announcement from the ECB, the liquidity argument kicked in. As we learned from QE2, securities' buying by the central bank in the current economic environment has little to no impact on economic growth but has a tremendous effect on the markets, so never underestimate the Fed (or ECB) and never underestimate liquidity!

What are the caveats?

Ø  The described situation showed the picture before Standard & Poor's downgraded US Government debt from AAA to AA+.

Ø  Liquidity and sentiment are the most important market drivers at a given fundamental environment. Once the fundamental picture changes, it becomes the dominant component that dictates the direction of the market while liquidity and sentiment only have short-term effects.

Ø  The fundamental picture already started to deteriorate a few months ago and the recent developments from Washington's debt debate to Europe's escalating sovereign debt crisis to Friday's rating downgrade is not reflected in any macro-economic numbers (same as July's labor report as a "back-ward looking" economic indicator by definition also didn't reflect any of the mentioned developments, yet!).

Ø  QE1 and QE2 in the US had a powerful effect on the stock market as prices were depressed and already reflected the worst. Now stock prices are "only" 10%+ off the highs from a almost 2 ½ year long rally reflecting record earnings growth and an economic recovery in the second half of this year. All this is uncertain and nobody knows how long global and US economic growth will be slow and how weak it will actually get.

Ø  Investors and analysts are much more critical of any QE activity now than they were a year ago.

Not surprisingly it is impossible to make any calls on the market at this stage. There is a good chance that the psychological affect from the US rating downgrade and a possible lack of QE3 announcement (still, many investors and analysts hope for more quantitative easing) at tomorrow's FOMC meeting will lead to continued weakness in the short run, beyond Friday's lows, before the positive perception in context of any central bank intervention, coupled with negative sentiment and bottom fishing at technical support levels kicks in. We could also have the opposite effect and see some short-covering based on the argument that the uncertainty around any rating agency action is now out of the way followed by more selling at a later stage.

However you turn it, one factor is certain: the global macro-economic environment remains more uncertain than ever, it's not fully reflected in stock prices yet and it will keep a cap on any meaningful market rally!

Trade well.


(Marco Bonelli is the Managing Director - International for CL King & Associate in New York. The opinions expressed are his own)

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