Friday, 28 September 2012

Week in review: The dark clouds return…

“We are asking the nations of Europe between whom rivers of blood have flowed to forget the feuds of a thousand years” said Churchill. The deep-felt suspicion and animosity between European partners will always be a challenge to those tasked with uniting it. So, in a bad week for risk assets it was indeed European antagonism that depressed sentiment the most.

After my post on Wednesday and Mike’s yesterday there is perhaps little more to say about the looming threat of separatism by the Catalans. Polls have indicated increasing support for the idea of some additional autonomy for Catalonia (or the Catalan countries which includes the Balearic Islands, Andorra and part of France). Whether that support could ever be transformed into a workable manifesto for independence remains to be seen but, as Mike discussed this morning, constitutional measures will be employed to try and prevent the vote even happening. A well-received Spanish budget also softened the blow.

Nevertheless most equity markets fell during the week, and were not helped by disappointing industrial production figures for South Korea and Japan. Japan was one of only two major markets which fell over the 3rd quarter (the other being China). The most obvious explanation has been the strength of the yen (relative to the dollar) so when the Federal Reserve initiated its open-ended QE programme, the Bank of Japan needed to match or exceed it. Instead, promising a mere ¥10trn more to be spent by the end of 2013 did nothing to restore Japanese competitiveness and therefore weighed on Japanese shares.

Source: Bloomberg

Competitiveness also seems to be falling by the wayside for France. The Republic will struggle to match its trend growth of 2% in the future but Mr Hollande’s government has responded by raising taxes (today imposing a 75% rate on top-earners) and lowering the retirement age. It has not managed a budget surplus in over twenty years and yet shows no signs of addressing the issue.

We have lamented French reluctance to become competitive before, as well as the European delusion that tax increases can somehow address the region’s difficulties. Increasing taxes to improve competitiveness is like putting on roller skates to climb a hill.

Survey data provide a mixed picture of the US economy. The Conference Board index of consumer confidence was far stronger than most commentators expected and the improvement was mirrored in the University of Michigan Confidence index as the economic news continues along the long road to recovery, but as the rain clouds replaced this morning’s sunshine in London, investors leave for the weekend feeling gloomy.

Source: Bloomberg
Guy Foster
Head of Portfolio Strategy

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