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All eyes and ears on gold & Jackson Hole


When US Federal Reserve Chairman speaks at Jackson Hole, all ears will be trained for confirmation or otherwise that another round of market support is on its way say Mark McFarland.

August 29, 2012 4:06 by

As always in summer months, markets can move a long way without too much substance in the background.  Last summer’s hefty losses have become this year’s gains, but on steadily declining volumes, particularly in G7 equities.  In equities, MSCI G7 is up 3.7% quarter to date while MSCI Emerging Markets have gained a lesser 3%. Within the very diverse markets of emerging and frontier countries, Eastern Europe has gained 5.9% in MSCI index terms and Africa markets (primarily Nigerian markets) have gained 13.7%.  Tunisian and Egyptian equities have also been beneficiaries of improved sentiment as the new Egyptian administration has gained in credibility.


The extent of fragile sentiment can be seen in the behaviour of developed market equities. Improving economic surprises in the US have been evident since late July and some decent numbers coming through, albeit from a very low base, in the US home building sector have added to confidence.   The 10-year government bond yield has risen from a low of 1.3875% on 24 July to a recent high of 1.8346% on 16 August and the S&P500 hit a four year high of 1,426 on 21 August. The US equity market immediately sold to test 1,400, only to rally again on Friday afternoon after US Federal Reserve chairman Ben Bernanke was reported to have written to Chairman of the House Oversight & Government Reform Committee, Darrell Issa, to express willingness to ease financial conditions further and encourage economic recovery.


European markets have also been boosted by a new sense of belief that ‘something’ is being done, namely that the European Central Bank will engage in a bond-buying programme, or QE to call it a spade. The spread between the MarkitiTraxx CDS on 125 investment grade European corporates and its US equivalent has fallen from an all-time high of 99 on 24 July to a recent low of 64pts. But, truth be told, we aren’t much closer to resolution of Europe’s problems than six weeks ago and this should be considered carefully by investors wishing to take on additional risk.  The European-US corporate CDS spread has risen again, primarily because of an increase in the cost of default insurance for European corporates.

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