Bottom fishing with the one hand but holding off with the other
Mike Lenhoff – Chief Strategist
Brewin Dolphin
Investment Research
8 August 2011
Last Friday Standard & Poor’s took away the triple A credit rating from US Treasuries. Earlier this year the rating agency served notice on the US Government that its top credit rating was at risk. Last month, it spelled out what it thought was an appropriate bar, at least initially, for eventually stabilizing the US debt-to-GDP ratio; $4 trillion of budget savings over 10 years but Congress delivered far less.
Yesterday, the G7, G20 and the ECB had various discussions in an attempt to stem the crisis of confidence affecting markets and they may continue. G7 indicated that it stood ready to take the action required to ensure the smooth functioning of the financial markets and to support growth. G20 gave its continued support for US Treasuries and, after acknowledging the new measures and reforms announced last week by Italy and Spain, the ECB said it would actively implement its Securities Market Program on the basis that EU governments commit to moving full speed ahead on the framework agreed in July.
All this is good to know but the markets will be looking for reassurance from the Federal Reserve when the Open Market Committee meets tomorrow. Without committing itself to more QE at this stage, the FOMC is likely to indicate how monetary policy can continue to be used to nurture back to health a recovery that has lost considerable momentum.
Also, this week’s economic news should provide something of a reminder that another part of the global economy has little of the developed world difficulties. In addition to tomorrow’s inflation news from China, industrial output and retail sales are expected to demonstrate the robustness of an economy that remains symbolic of the developing world’s contribution to the global economy and to global corporate earnings.
As the chart shows, the UK equity market is now in extreme oversold territory, a position unlikely to be vastly different from other equity markets. The FTSE All-World Index is down a little more than 11 percent over the past month and down about 13.5 percent from this year’s peak. Decent enough as far as corrections go. Equity markets are likely to remain unsettled for a while but like a portfolio manager colleague said, ‘you sort of wonder whether it’s right to start bottom fishing with the one hand while holding off with the other.’
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