Good Morning!

During yesterday’s trading session we saw renewed signs of fatigue in the stock markets as the Fed minutes failed to feed the momentum and the investors apparently focused on the negatives. The latter related mainly to the weak Chinese trading data and the ambitions of the Russian presidency of withstanding the West’s (largely moral) persuasion. We would highlight that the disappointment in Chinese export figures appears just an excuse for the sell-off as many of the articles covering this latest data downplayed its relevance by pointing out to seasonal factors and base effects (in the same period of the previous year, export growth was much higher than in the other months). On the other hand, the delay in the resolution of the Russian-Ukrainian standoff and Russia’s move to threaten its former economic partner is a more serious concern; Putin warned yesterday that Gazprom could ask Ukraine to prepay its gas purchases and that any delay in payments will trigger a halt in gas supplies.

The retreat in stock prices was quite broad based but the technology sector came in the spotlight again after making a sizable contribution to the US and Asian indices’ downturn; in Japan for example, SoftBank lead the decline. In terms of valuations (as captured by the Price to Earnings ratio), US tech equities do not stand out as vulnerable, posting a ratio of 17.59 vs 16.89 for the overall index (Bloomberg data); however, such stocks are preponderantly growth stocks and commensurately more sensitive to swings in investors’ sentiment. On the other hand, valuation metrics are much higher for Europe and Chinese tech stocks (44 and 37 respectively for MSCI Europe Information Technology and MSCI China Information technology according to Bloomberg). Against this background of weakening sentiment, the surprisingly good unemployment claims data was overlooked by the markets.

Within the emerging market space, India and Indonesia appear to benefit from favourable momentum while Turkey is seeing renewed downside pressure after Moody’s cut its rating outlook.

In the bond markets we are yet to see signs that demand is flattering. This definitely was not the case yesterday when Greece returned to the markets with a EUR2.5 billion bond and was persuaded by the generous demand to take as much as EUR3 billion for less than 5% interest. The decrease in US treasuries in the aftermath of FED minutes provided an additional boost to credit markets but it also highlights the increasing volatility of the market as the Fed moves closer to the QE exit; that is, as was the case in UK, qualitative guidance is much more ambiguous than the former quantitative guidance and complicates investors’ assessment of future interest rates.

Today we will focus on the final inflation figures from Germany, US consumer confidence data and press statements coming from the participants at the G20 and IMF/World Bank meetings.

Have a nice day,