Monday, 9 January 2012

Amid good and bad news equity markets wait for a lead

Mike Lenhoff's market tactics - 9 January 2011

The US earnings season for the final quarter of 2011 begins this week, getting into full swing next week. However, the preannouncements thus far have not been good. Worrying too is the earnings outlook for this year which has been downgraded considerably since August.

On the other hand, last Friday’s US employment numbers were better than expected and left little doubt about the underlying trend towards improvement in the US jobs market. Overall, we are overweight US equities.

The prospects for oil prices and the potential for a heightened level of instability in the Middle East are also concerns given the tensions between Iran and the US/EU. The latest developments could put at risk the prospects for global trade and growth.
Turning to the eurozone, Chancellor Merkel and President Sarkozy meet today to review what might be done to assist growth and to lay out the framework for adopting the fiscal compact agreed at the EU’s last summit of 2011. While it is hard to imagine that much can be done about the former, on the latter eurozone leaders will have to move quickly on the intergovernmental treaty that was expected to be in place by March. It will be good going, indeed astonishing, if this can be achieved.

As for the ECB, the introduction of the three-year Long-Term Refinancing Operation shows a readiness not seen before to ensure the stability of the banking system. While it is not yet clear how helpful this will prove in alleviating the stress in funding markets for the banks, the widening in the spread between three-month Euribor and Overnight Index Swaps may have run its course. If sentiment towards the banks is in the process of changing, it is also likely to be changing for equity markets. We are marginally overweight equities. Full story

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