Looking Back & Forward
The Beginning of the End of Easy Money: Global equities rallied 3.9% from their lows to post reasonable returns in February, in what was essentially a month of two halves. Despite sovereign debt concerns in Europe, continued policy tightening from China (RRR rate hike) and a surprise hike in the Fed discount rate, equities still managed to post modest returns, with the MSCI World index rising 1.4%.
The US 10-year yield rose marginally over the month, after plunging to a low of 3.56% in early February, as increased fears over Greece boosted demand for safe- haven assets. Coupled with rising concerns over the pace of a Euroland recovery, both the Japanese Yen and the US dollar made solid gains against the Euro.
February saw commodities post strong gains with Cotton (19.7%), Crude (9.3%) and Corn (9.1%) the best performers. Sugar was a big underperformer this month (-19.3%) owing to better than expected harvest in Brazil and India.
Amongst major regional MSCI indices, the US outperformed (3.1%) with the MSCI EM index rising 0.4%. At a sector level, the cyclical sectors - Tech (3.2%),
Materials (2.6%) and Industrials (2.4%) - were the best performers while Utilities (-1.3%) and Telecom (-0.9%) lagged.
This month, the divergence in the economic recovery across regions came into focus. The recovery in Europe stumbled, with weak IP numbers and sentiment indicators and disappointing German and Italian GDP data. At the same time, Japanese GDP came in stronger than expected and Asia continued its strong recovery. Globally, the divergence of monetary policy in the exit phase is all the more stark, with China and the US tightening liquidity conditions, Australia holding the cash rate steady in February, and Japan training up its focus on deflation. Moreover, the sovereign risk scare in Greece has put the issue of public debt in the spotlight, especially after the massive swap of liabilities from private to public balance sheets that preceded it.
Low-Conviction Market: The S&P 500 ended February 2.9% higher after rallying 4.5% from its mid-month low and performing in-line with its safe haven status amongst global developed equity markets. In light of a broad rise in risk aversion on the back of continued sovereign debt concerns in Europe and the Fed’s decision to raise the discount rate, equities held reasonably well but lack strong conviction. The USD continued to rally against the Euro, and Treasury yields remained below 2009 year-end levels as expectations surrounding relative growth differentials continued to offer support.
Europe
European markets declined 2% in February, reflecting growing sovereign debt concerns in the periphery and weakness emerging in core Europe. Amongst major developed market MSCI indices, Europe was the worst performing market. The Euro continued to fall against the dollar and the Yen amid rising growth and sovereign debt concerns.
Consumer Staples (-0.5%), Health Care (-0.8%) and Materials (-1.1%) were the best performing sectors this month, while Consumer Discretionary (-3.9%), Utilities (-3.6%) and Energy (-3.5%) lagged. Among countries, Sweden (2.9%), Switzerland (1.9 %) and Denmark (-1.3%) were the outperformers, while Greece (-9.8%), Spain (-7.2%) and Portugal (-6.0%) were the worst performers this month. Large caps outperformed small caps, reversing their previous month trend, while growth continued to outperform value.
A month of disappointment: Euro area GDP growth fell short of expectations, registering just a 0.1% Q/Q gain in 4Q09. German economic growth stagnated in 4Q09, while Italy’s economy contracted after a solid exit from recession in 3Q. France reported better than expected growth, while the UK’s 4Q09 GDP was revised upward to 0.3% Q/Q from an initially reported 0.1% growth. Most of the regional surveys and sentiment indicators fell this month. The IFO Business survey fell unexpectedly while Eurozone economic sentiment dropped for the first time in 11 months. Better than consensus expectations, the ZEW business expectations survey eased slightly to 45.1 in February, after 47.2 in January. Industrial production plunged unexpectedly in the Euro area with Germany, Italy and France disappointing.
Stay long US versus European equities: We prefer US over Europe equities. This is a relative call reinforced by the European-centered sovereign debt stress. We think this is a legitimate concern (see Greg Peters, “Sovereign Crisis Roadmap”, 11 February). But even if sovereign stress fades as a market issue we would still prefer the US. For more details, see Global Equity Strategy “Long US versus European Equities” 16 Feb 2010
In The Flow – February 2010 -
No comments:
Post a Comment