12 September 2011

Market Commentary

There was some positive news on the economic front. The US ISM non-manufacturing PMI actually rose (53.3 in August versus 52.7 in July), against expectations of a continued slowdown (51.0). This means that respondents indicated an accelerated pace of increase in business activity. Germany’s July industrial production rose 4%, against expectations of a 0.5% rise. Still, the negatives continue to overwhelm the positives as the global economic slowdown continues. Manufacturing PMI across the globe is weak with countries like South Korea, Taiwan, France, Italy and the UK contracting, while manufacturing powerhouses (Germany and China) barely staying above the 50 expansionary level.

Consumer spending continues to hold up in the US (Figure 1) but one wonders how long can this last if the job market weakens. The jobs report was disappointing with zero jobs added last month. Importantly, leading indicators like hours worked and hourly earnings fell.

Figure 1: Personal consumption expenditures continue to increase despite ongoing economic slowdown.

Volatility remains high with large movements in equity markets, both to the upside and downside. The VIX index remains elevated although it is off its recent high. TED spreads continue to rise (Figure 2) as worries over the European banking system increases.

Figure 2: TED spreads have been rising steadily since the beginning of August.

Investors continue to pile into safe havens, sending US 10-year Treasury yields below 2%, levels even lower than the dark days of 2008. This, we suspect, is largely driven by fears of a messy outcome in Europe’s handling of the debt crisis and the implications of an impaired banking sector to European growth. European financials continue to underperform both on an absolute basis (Figure 3) and relative basis (Figure 4), a sign that investors expect more negative news to come out of Europe.

Figure 3: European financials have yet to stabilse.

Figure 4: Relative to the market, European financials continue to underperform.

Policy

Not surprisingly, European policy making continues to disappoint. Decision making that involves more than ten different countries takes time and effort to reach a consensus. Unfortunately, as the economy slows and slides towards a potential recession, time is not a luxury. Leaving the ECB to support bond yields looks increasingly untenable with the surprise resignation of a ECB board member1. It seems that unless a huge crisis happens, European policy makers are unlikely to move with a greater sense of urgency.

There were some positive news from other parts of the world. In view of the rising economic uncertainty, central banks have eased off the brake pedal in Asia while Brazil cut interest rates. Over in the US, the FED remains committed to some form of easing although specifics were lacking until the next meeting in September. Obama’s US$447 billion jobs bill looks promising in terms of stimulating the economy but we fear the problems in Europe could over shadow any morsel of positive news.

Conclusion

Overall we see the trend as remaining negative especially in view of the poor market signals that we have been receiving. As such we will be seeking a further reduction in equity exposure at the appropriate time.



References
1. Markets tumble after ECB's Jurgen Stark resigns. 12 September 2011. The Telegraph

IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

GYC FINANCIAL ADVISORY PTE LTD  1 Raffles Place #15-01 One Raffles Place, Singapore 048616
Tel: (65) 6349-1441 | Fax: (65) 6349-1440 | Email: enquiries@gyc.com.sg | Co Reg: 199806191-K
Website: www.gyc.com.sg