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The Eurozone remains paramount as investors hope for a Santa Claus rally
Volatility, it would seem, is the only thing that can be relied upon. With almost resigned inevitability, the huge gains the market saw in October were given back in November, albeit not entirely. The FTSE 100 saw the longest losing streak since January 2003, as the index fell for nine straight sessions. However, this was followed by a huge rally, aided by co-ordinated central bank action which helped to add around 400 points in four days. The technical indicators still play second fiddle to the newsflow and as we move into December, somehow the bulls are staging something of a fightback. The latest events surrounding the Eurozone continues to drive investor sentiment from a day to day basis.
Bond yields in the peripheral countries push ever higher, and with Banks beginning to publish reports on a return to sovereign currencies, even if such a scenario is not being discussed publically by governments surely the technocrats behind the scenes are hard at work on a plan. Despite this the prospect of serious co-ordinated action by the politicians still has the power to move the markets higher. However, the global economic outlook continues to deteriorate. Chinese PMI data suggests contraction with a hard landing a real possibility. Furthermore growth rates around the western world continue to trend towards another recession and consumer confidence remains in tatters. We are now into Santa Claus rally season but investors will probably need a little more than the sight of Coca Cola’s bearded creation to encourage them to be bullish. It will need serious action from European politicians and possibly Angela Merkel to stop blocking the potential for the ECB to either print to devalue or issue Eurobonds.
The equity markets may then deliver a nice end of year present for investors to really enjoy.
With the volatility seen in November there has actually been little overall change on a sector level. There are still 23 sectors trading below a falling 200 day moving average (as the market is, see above) and are therefore in bearish configuration. There remains only five sectors that continue in bullish configuration, trading above a rising 200 day moving average. On a sector level the market remains broadly weak.
Amid the volatility and fear generated by the Eurozone sovereign debt crisis the risk sectors continue to be weak performers. Financials remain under severe pressure, with Banks and Financial Services especially suffering, while metal sectors of Mining and Industrial Metals are also badly underperforming. The best performers continue to come from the defensive end of the beta spectrum. Tobacco stocks are probably still best in class, with continued excellent performance. Other strong sectors include Electricity, Food Producers, Pharmaceuticals, and Gas, Water & Multiutilities. The Media sector is worthy of note with a strong relative performance, while the Industrial Engineering sector is attempting to break higher from a base pattern.
November was a difficult month on the credit markets as bond yields on some Club Med Eurozone countries pushed dangerous levels. Despite the support that has been formed in the equity markets, the debt markets appear to seriously mistrust the politicians at the moment. While the Spanish 10 year yield flirted with the dreaded 7% level (above which Greece, Ireland and Portugal all needed bailouts), Italy has actually breached the threshold. A failed German bond auction was concerning as it suggested that investors were extremely worried about lending to the country which effectively bank rolls all the troubled peripheries. Credit rating agencies are also having their say, with Belgium and Hungary enduring downgrades while the AAA status of France continues to be threatened. There are now only 6 Eurozone countries with the prized triple-A rating.
News that the world’s major central Banks had collaborated together to ensure that dollar liquidity remained fluid came as extremely welcome news for equity markets. This sent out a strong signal of a willingness and ability to act collectively to shore up the banking system. Furthermore, China and Brazil both moved to ease monetary policy, while next week’s ECB meeting could easily contain a 50bps rate cut. These are all market positive moves. However, investors are now looking towards the EU summit on 9th December for a rabbit to be drawn from the hat. If Merkel can be persuaded, it is possible that the ECB may be given the powers to issue Eurobonds, or even embark upon QE. Either of these would certainly be a fillip to the markets.
The UK remains in economic strife. With unemployment rising, high inflation and weak PMIs that are being held back by export concerns. The troubles in the Eurozone, the UK’s largest trading partner, are really beginning to bite. However, the US is actually holding up relatively well. Consumer confidence is picking up, unemployment is showing signs of improvement, while PMI numbers are encouraging, which suggests the world’s largest economy is actually performing quite stoically.
Investors may have noticed that the performance of gold seems to have moved away from its safe haven status and become more aligned with the market. This may be down to a combination of dollar strength and increased investor redemptions. However, the long term fundamentals for gold remain sound and this is still likely to be more of a near term blip than a long term shift in outlook.
December is historically a strong month for investors with the Footsie rising in 20 of the past 22 years. However, despite the best efforts of central Banks, it seems very much as though the prospect of Santa Claus may be overridden by events in the Eurozone. Let’s just hope the politicians can give us a happy Christmas.
This report was written by Richard Perry – Chief Market Strategist at Central Markets www.centralmarkets.co.uk The writer does not hold a position in the company featured, but client accounts may. The material in this report has come from the company’s corporate website and Alpha Terminal.
