The are many fund managers who are glad to see this quarter come to an end as it has been a rough road for risk assets as the Euro debt crisis has held world markets hostage. With the persistent fear that things will worsen in the EU and no resolution in sight, long-term growth projections are nearly impossible to forecast.
This all adds up to uncertainty which in turn creates volatility, and the lack of direction is disconcerting to say the least. Without a clear picture emerging, the longer the uncertainty persists the more difficult it becomes to return to economic health.
So far the Euro debt crisis is moving along at a glacial pace, with the required votes taking place but not acting fast enough to satisfy the markets. The problems with Greece are still weighing heavily and the lack of a long-term solution in favor of stop-gap measures keeps the investing climate negative. The end result of all of this week’s Euro drama is that for now Greece remains on pace to receive the next tranche of bailout money (a meager $8 billion in the grand scheme of things) and the question remains whether this is too little, too late. Only time will tell.
Meanwhile as we return to the current economic situation (which has taken a back seat to Euro debt drama), the Euro zone reported CPI data that came in much higher than expected, showing 3% inflation vs. the expectation of 2.5%. This might normally have a positive effect on the Euro as the market would expect the ECB to raise rates, but they are hand-cuffed now by the debt problems. As time drags on, the situation in the EU is looking more and more untenable.
Adding to the global slowdown story is news that China is slowing as manufacturing PMI data came in flat showing no growth. While this normally will have a negative effect on the antipodean currencies (it did!), there was added pressure on the New Zealand kiwi as they received a credit downgrade from Fitch and S&P.
In other news, Japanese industrial production has improved to almost pre-tsunami levels, yet the figures came in lower than expected. The jobless rate in Japan also fell to 4.3% from an expected 4.7% and consumer prices edged slightly higher. Both of these are positive data points for Japan, who is struggling to recover with a stronger Yen.
In Canada, GDP figures came in as expected and were slightly higher than the last reading which is significant as they are hanging in there economically despite a slowdown in the US.
Here in the US, personal spending and income figures came in lower than last month’s reading but in-line with reduced expectations. Later this morning the U of Michigan confidence figures are due out and I can’t imagine a positive reading at this point.
This all adds up to risk aversion in the markets, with the Dollar and Yen strength and stock and commodity markets weakness. It is difficult to go into the weekend “long risk” as the uncertainty of the Euro debt crisis looms. A pattern is emerging where the risk appetite increases on Monday and Tuesday, then begins to flip to risk aversion as we head toward the end of the week. This has been especially true with the high hopes the markets have for a Euro resolution, only to be disappointed again and again.
In these uncertain times, it is important to follow the market and not try to guess what may happen. Short-term traders have had more success than longer-term investors as the volatility that has been created suits that style better. If volatility persists, then you may want to consider shortening your horizon.