Friday, 13 July 2012

Week in Review: Happy Friday 13th


Whether its building walls, assembling terracotta armies or reporting economic data. China likes to do things big.

Hence they reported data on GDP, industrial production, fixed asset investment and retail sales simultaneously in the early hours of this morning. In the second quarter Chinese GDP was estimated to have grown by 7.6% compared to a year earlier, its lowest level since May 2009. Industrial Production stabilised at 9.5% year-on-year; still close to those May 2009 levels.

China wants to rebalance its economy away from investment and towards consumption, while the US wants to achieve the opposite.  I want to join the Royal Ballet but in a difficult economic growth environment we all take what we can get. So, for the moment: the US relishes every dollar spent by the consumer; China thanks its various lucky icons that fixed asset investment was better than expected; and I have yet to abandon this computer in favour of a leotard!

Overcoming low expectations

Equities failed to make much headway during the week. This is hardly surprising as little in the way of concrete measures was announced to overcome the slowdown in economic data or quell the uncertainty over the either the eurozone debt crisis or the approach of tax hikes and spending cuts in the US at the end of this year.

Currency markets, meanwhile, were more optimistic. The euro rose nearly a percent over the week and other risk-on currencies such as the Aussie dollar were also positive.

And in the bond markets, a rare good week for Spanish bonds allowed traders to enter the weekend in reasonably high spirits. More surprising, perhaps, was today’s bond auction by Italy. For a distressed debtor, having an auction on Friday 13th may seem like folly under normal circumstances but in Italy’s case it also followed hot on the heels of a downgrade by Moody’s. We have discussed before how these downgrades don’t provide much information to investors. But Italian borrowing costs fell regardless of Moody’s scepticism.

The path to Eurozone salvation will be found, as I have written before, when investors look at Spanish and Italian bond yields and see them as an opportunity rather than a threat. I don’t think we are quite there yet but this week offered some encouragement.


Guy Foster
Head of Portfolio Strategy

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