In Europe the words of the President of the ECB, Mario Draghi, continue to be scrutinised by the investment community. It seems that despite the howling protests of the Germans there is an acceptance of the need for the ECB to backstop European bond markets – a point we have been very clear on for some time.
Although we caution that the current wave of euphoria will be met by further political hurdles (most notably the approaching Dutch elections) investors have, on balance, accepted that Europe is making progress. So while the UK, German and US equity markets strolled forwards with sub 1% advances, the garlic belt of Portugal, Italy, Greece and Spain galloped to gains of between 3% and 5%.
Japan was also able to join their club as investor enthusiasm saw the yen decline (bolstering Japanese companies’ earnings from overseas).
Overall, market response to the European developments has been somewhat erratic: the equity market cheered as stated above; the euro declined, which is consistent with the idea of a more accommodating ECB; the chances of a Spanish or Italian default did decline as measured by Credit Default Swaps (CDS); but the ultimate arbiter of creditworthiness, Spanish and Italian bond yields, drifted higher over the week.
As the markets continue deeper into their summer lull a lack of stimulus will likely see a period of consolidation before the Dutch, including the Eurosceptic Freedom Party, go to the polls in September.
Head of Portfolio Strategy