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Good morning,
Markets are called lower this morning. This is what's happening today:
The markets turned negative during yesterday's session which started off postively after jobless claims in the US rose by 4,000 for a second week to reach 372,000 in the period ended Aug. 18. Also consumer confidence in the US dropped last week to the lowest level since January. What I find difficult to understand is why the markets were euphoric when HSBC lowered China's PMI for August and from the FOMC minutes it is evident that many members want further quantitative easing in the US. On the other hand when negative unemployment data came out, the markets turned negative. Looking at this piece of information by itself, it makes sense that the markets fall however doesn't an increase in unemployment increase the possibility of further easing? Hence if the markets were rallying in the morning despite the negative news out of China because of potential expansionary policy in China and the US, however, when there was more reason to hope for QE3 the markets turned negative!
The market got it wrong big time in the morning. How can you rally when HSBC cut China's PMI number for August and reduced China's growth forecast for 2012 to 8% from 8.4%? The markets were hopeful that this would translate into further easing. Though shouldn't this also apply for the US? Now you can see the big difference between China and the US. Despite the negative news coming out of China, the market rallies on potential expansionary policy even when negative data comes out. The Chinese premier said time and time again that they are looking at ways of how to stimulate the economy. And the truth is the Chinese can do it with any tool they want because they have what they need to boost growth internally. So China was never a problem. Ok the slowdown in global growth is having a negative effect on China but isn't this obvious? What intrigues me, which the market is not as excited about is the fact that despite all this negativity in Europe, China is still expected to grow at a rate of 8% in 2012 (which will probably be great should easing kick in at some point in time during 2012).
On the other hand we have the US. The market is hopeful that there will be further easing though when negative data comes out the market starts to panic. Isn't this contradictory? The truth is that it is far from simple for the US like it is for China. The US has 3 problems (actually 4). The first is that there are elections coming up in November. So there is a greater probability that the Fed will delay QE3 or any other type of expansionary monetary policy to the beginning of 2013. The second reason is that the US does not have the luxury the Chinese have to use any tool they like. The Fed's hands are tied with interest rates in the US close to zero. The third is that the US has a massive debt balance which although the market seems to forget about short term because it is more focused on Europe, will return to haunt the markets in the near future. The last reason which is not something which politicials are worried about today but where terrified of in the past is inflation. The Fed changed its policy to pro growth rather than focus mainly on inflation. However once inflation kicks in with all these easing measures, the US government will have another problem on its hands.
Property prices have started to go up in the US. But if unemployment does not improve and hovers around the 8% level, the situation in the US can only get worse becuase it costs more to buy a house yet the people claiming unemployment benefits is not decreasing.
Though what's even more confusing is that the rally in the market in Europe was triggered by potential stimulus in the US and China. As if Europe doesn't have problems of its own which are much bigger. We are seeing the Euro rally against the Dollar because the market is convinced there will be more easing in the US. Everytime Europe rallies, it has nothing to do with Europe! We need Europe to start rallying because things are happening in Europe before we convince ourselves to shift out of US corporates into European ones and more importantly out of the Dollar and into the Euro.
Irrelevant if the market is right or wrong, the market makes the price. And from what is being indicated, this call for further stimulus in the US is causing a rise in the value of the EURUSD which is now at $1.2563 up from its low of $1.2061. Ironically what the EURUSD is telling you is that there is greater probability of further easing in the US than there is in Europe. This contradicts the rally in the markets we have seen over the last couple of weeks when Draghi said that he will do all he can to save the Euro. Still makes sense to convert some dollars into Euros, though do still hold a dollar balance in your portfolio!
Yes it makes sense to be in the market at this point in time and it does make sense to start shifting into European names. Though don't get caught up trying to trade this market because the volatility will only result in losses in your portfolio. Pick up bluechips which are trading at a discount to their peers and trading on attractive multiples. And make sure your portfolio has a good dose of US and Chinese corporates before you start adding on European positions. Get a copy of our CC equity list to understand better where we are investing clients' money.
Stock to watch: Saipem (E37.72, Price Target E39)
Saipem offers an impressive growth outlook underpinned by qualities that we argue are key to delivery and out-performance. The key components of Saipem's backlog in the near to medium term include: i) analysis of backlog cover, ii) solid 'backlog longevity', iii) market leadership in the high margin offshore rigid pipeline segment, iv) strong presence in the Middle East, and v) analysis of Saipem's risk profile and contracting approach that argues for impressive execution and earnings delivery. Buy
For further information on Saipem or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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