Perspective on financial markets – bad surprises in store for Q4 2011?

Europe: European stock markets are in the doldrums. The EuroStoxx 50 had recovered from its major low in early 2009, but then went into free fall in Aug 2011. Equity markets are now much driven by the bad news about European sovereign debt crisis, either real bad news about European banks or speculation that the banks are still undercapitalised and some may hit the buffers should Greece default sooner than acceptable for the banks. From a technical point of view, the outlook is not rosy with a few key technical indicators boldly pointing south.

USA: After the heat of the financial crisis in 2007/08 lessened, the stock market recovered dramatically from early 2009. The S&P 500 developed a nice uptrend whose enthusiasm got dampened only in May/June 2010. Still the uptrend continued as if there had never been any financial crisis, credit crunch or subprime mortgage problem. The US stock barometer reached a post-crisis peak in early May 2011, before the stock market fell into the abyss end of July and during Aug 2011 when most people were on holidays. Since mid Aug, bulls and bears are fighting it out, causing the index to settle into a trading range. Quite certainly it will break out of that one day.

China: Equity markets there were in a healthy uptrend beginning early 2009 and ending in Nov 2010, offering ample profits. Since then the Chinese equity markets (focus on the Hang Seng index) have fallen significantly, but they are still substantially above the level of end of 2008. The Hang Seng has recently successfully tested a support level from 2010. Like a number of other markets it has moved into a trading range since mid-August and is awaiting a breakout, either north or south, as usual.

India: The market has risen since begin of 2009. The two-year uptrend came to a stop in Nov 2010. Then in 2011, the market fell to a bottom in Feb 2011, recovered a bit and finally got pushed over the edge end of July and in Aug 2011. The recent low was reached near a support level from 2009. Since then, the index struggles in a trading range.

Brazil: The stock market performance there, measured by the Bovespa Index, follows a similar pattern as other major equity markets. It has been in a downtrend in 2011 and is currently trying to achieve a turn. Similar to the Chinese market, the Brazilian market seems in better form than the European market, not as much pulled down into the neighbourhood of the 2008 major bottom.

Commodities: Gold in USD had a fantastic rally since late 2008, with the gold price moving from around USD 740 to USD 1900. The jittery equity markets in Aug 2011 pushed the gold price further up to lofty heights where it currently wonders whether it should stay there in a trading range or move even higher and peak should Greece one day declare default. Copper enjoyed a similar bull market, rising from around USD 2,900 to around USD 10,000 before falling back now to a USD 8,800 level. Similar to copper, the oil price (Brent) was in a textbook-like boom from begin 2009 to April 2011, before the Brent oil price started to drop, driven down by news about lower GDP growth in many regions. For those, who need a coffee to calm their nerves about equity markets these days, either they were in the coffee bull market from 2009 to 9 Mar 2011 and still enjoy their gains from those days, or they find that coffee prices are now very volatile and increasing adrenalin levels, the prices providing the chance of investors getting sliced by a falling knife or a chance to make a 20% gain only in a few weeks as was the opportunity in August 2011. Quite interesting this as the world looked terribly bad during the August summer holidays, whilst coffee delivered a great rally.

Currencies: In the currency markets worth a note about the Swiss Franc. The CHF has rallied as investors remember Switzerland to be a non-member of the shaky Eurozone. Since Oct 2007 the Euro has fallen persistently against the Swiss Franc until 10 Aug 2011, which might be annoying for anyone who took out loans in CHF with the need to fund payments from Euro income. However, since then the Euro has fought back a litte bit and knocked down the franc with EUR 1 now being worth about CHF 1.2065.

What has moved the markets? Europe is still in bad shape, the economy is growing surprisingly slowly in several countries including Germany and the UK. German exports are dampened by a slower-moving world economy. The Eurozone is in a serious crisis, with Ireland, Portugal and Greece trying to do their best to meet the conditions imposed in return for the provision of bailout funds. European politics are moving at a slow pace to invent something magic designed to avoid more troublesome developments; too slow for the OECD and the IMF who recently requested European political leaders to take more decisive joint action to do the impossible: reduce the sovereign debt overhang (as e.g. a priority in the UK), stimulate the economy (by more public spending and less cutting of public sector jobs as suggested in the US) and still better capitalise the European banks. Sovereign CDS spreads (premiums for insurance against default) for Greece indicate a likelihood of default of more than 90%. So then, are the mathematicians wrong and the markets just too scared or is default round the corner with a run on Greek (and maybe other European) banks in a matter of weeks or months? According to IMF/OECD sources, the Eurozone countries have two options left: i) either moving to a full fiscal union which seems unlikely to happen timely enough given the diversity of countries and nations or ii) changing the rules of the Eurozone and letting relevant countries leave the zone which some consider stepping back in history and a most serious debacle. Various voices recently warned from taking the current European and American situation too easy, with the CEO of Deutsche Bank warning of a possible new financial crisis only on 5 Sept.

In the US, sovereign debt has grown to the point that politicians fight over whether more debt shall be taken on to pay the government’s bills, which caused a debacle recently and led a rating agency to downgrade US debt one notch from AAA. Despite this, the 30 year US treasury yield is remarkably low, getting closer to the 2008 low, with investors still considering US government debt as a safe heaven. Whether the US manages to achieve a turnaround or with currently an unemployment rate of 9+% falls back into a second post-crisis recession needs to be seen.

A difficult place to be is Japan, with its economy still battered from the aftermath of earthquake, tsunami and nuclear disruption. Recently growth forecasts for the economy have been downgraded.

The place to be is China, at least for entrepreneurs. The number of billionaires (in USD) has apparently doubled within only two years. The market is huge which seems like golden times for enterprises with monopoly or near-monopoly status (e.g. in the search engine market). The problem is that China is still relying on someone to buy its export goods and those someone’s like the US or Europe are getting seemingly more into trouble than out of it. Were the domestic consumption already strong enough in China, its economy would power ahead, unimpressed by the issues incurred in over-indebted nations.

Other potential surprises for 2011: an actual default of Greece, a spread of the crisis to Italy or Spain, a further bank getting into financial difficulties and requesting a bailout which in turn stresses government debt levels which in turn causes a significant drop in the bank’s home country stock market index. More cuts being made by corporations which got hit either by the financial turmoil (like Bank of America, US) or by announced policy changes (e.g. move away from nuclear power, cf. E.ON, DE), a soaring oil price should any of the autumn hurricanes plough through the Gulf of Mexico at level 4 or 5. And possibly new highs in the Apple share price though the shares appear slightly rich at a level of USD 380.

Disclaimer: The author is neither intending to give or is giving any financial advice.