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.


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.


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.

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

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