Mike Lenhoff's market tactics - 22 November 2011
Stress in euro funding markets has been building for some while but it has been mounting for dollar funding as well. As the chart shows, the spread between 3-month interbank euro lending rates and less risky overnight index swaps is as wide as it was prior to the worst of the financial crisis. The corresponding spread for dollar lending is narrow in relation to where it was back then but the spread is also widening.
This stress in funding markets, which reflects concerns over counterparty risk as well as the consolidation underway in banks’ balance sheets, puts at risk the outlook for the global economy. Bond and equity markets have been consumed by it all for some while, with the latter focusing on the valuations that apply in an environment of growing uncertainty for earnings.
With 2011 pretty well in the bag, the following chart shows how rapidly consensus expectations for earnings growth next year have been revised downwards in recent months for the developed markets (using the FTSE World Index which is mostly developed markets). The revisions are across the board - for the US and UK as well as for the eurozone - and are likely to be sustained.
For the developing equity markets, consensus earnings expectations have thus far held up well though this has mostly to do with emerging Asia and Latin America where earnings are still expected to grow strongly. Earnings for emerging Europe are expected to decline next year reflecting the outlook for the eurozone, a good part of which is already in recession or heading that way.
This year, like last year, has not been easy but, as always, stock markets are markets of stocks with winners and losers – and not just in relative terms. For example, while the FTSE 100 is down some 11.5 percent for the year to date, a little more than a quarter of the index has risen in absolute terms and more than half of these have been defensive. Moreover, each of these started the year with an above average dividend yield, such as Tate & Lyle, British American Tobacco, Imperial Tobacco, GlaxoSmithKline, Diageo, National Grid, Severn Trent, Scottish & Southern Energy, Unilever and several others. More >