Friday, 20 July 2012

Week In Review: Spainful

The Olympics are almost upon us and the Gulf Stream, having apparently moved north, is to offer a brief window from the incessant bad weather.  It seems the planets are finally aligning to provide the UK, and London, in particular, with an opportunity to actually enjoy the Games.

Of course, hosting a successful Olympics is more than just praying for good weather.  The UK’s ability to provide world class facilities and personnel will also be put to the test.  But the atmosphere for the Games is provided by the spectators and the t-shirt I saw hanging in a shop window at lunchtime suggests that what we Londoners lack in literacy, we will make up for in enthusiasm.

Well done Snappy Snaps!
Over the week, economic data provided mixed signals for equity markets.  US unemployment claims continued the trend of weakness that has been established over recent weeks.  Housing data, on the other hand, was much more robust (again in keeping with recent trends).  Overall investors in US equity, whose ranks we swell, remain unconvinced that the recovery is ongoing and unconvinced that the Fed are on the verge of stimulus.  As we discussed in Weak Is The New Strong, at this point in the despair/euphoria range, investors are looking for data which is bad enough to prompt QE but instead are receiving tedious banality.

Despite this, the equity market du jour, the US, crawled higher by nearly a percent (at the time of writing), but a beastly Friday obliterated the UK’s gains and swelled losses from peripheral Europe.  The IBEX index of Spanish equities fell over 6% during the week, with most of the falls happening today as growth forecasts were cut making the need for a full bailout programme, which in one swoop would virtually exhaust the European Stability Mechanism (ESM) bailout fund more likely.  

Spanish government bond yields, the bellwether of the eurozone crisis, surpassed the magical 7% level at which the policymakers tend to think that they need to do something, so we can expect some hurried reactions next week.  Crucially the level of bond yields does not matter unless the respective government is actually seeking to raise money. Yesterday Spain was, and a further €3bn was issued at the new high borrowing rates.   

Germany, as usual, was providing the equal and opposite reaction to Spanish stress. We have commented before on negative yields on German bonds but this week saw Germany actually issuing two year bonds (borrowing for two years) with a negative yield (being paid to borrow money).  If you think that being paid to borrow money in return for sound management of your finances is an exclusive deal offered to the German state, then the might direct you to the wonder of cash back credit cards so you can be a German too!*
 Guy Foster
Head of Portfolio Strategy

* Please note that this is not an endorsement of taking out credit cards!

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