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Good morning,
Markets are called higher this morning. This is what's happening today:
European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc. This comment by the ECB president triggered a rally in the markets with the CAC up over 4%, the IBEX up 6% and the DAX up 2.75%. This is good news for the market when the ECB president comes out saying that he will do all he can to save the Euro. However, analysts and institutions have been saying time and time again that the ECB needs to act. It cannot keep on sitting on the sidelines waiting and doing nothing. Now the ECB president passed one comment and the CAC is up 4%. Expect to see the rally go into next week before the ECB and Fed meetings. It would be interesting to see whether Draghi will come up with ways and means of how he is going to save the Euro.
I have said in the past that an investor should be invested in US stocks and emerging market stocks and stay out of the Eurozone. If a client wanted exposure to the Eurozone, it should have been through the DAX. Indeed the DAX is up 11.61% for the year whereas the CAC and FTSE are flat yoy. The argument to be invested in the DAX is because the German economy is the strongest in the Eurozone and because they are net exporters and the weaker the Euro, the better for the Germans.
I still think it isn't time to rush into the markets and I still think investors should be underweight Europe at this point in time. It is true that Europe is cheap when compared to the US though there are still alot of unanswered questions. Draghi said he will do all it takes to save the Euro, so why has he let Spanish yields go up to 7.6% before he realised the ECB has to do something? Institutions were calling for the ECB to act since summer of last year and all we saw since then were two LTRO exercises and one rate cut. The ECB needs to stop focusing on inflation and worry about growth like all the other central banks around the world.
We have seen the Euro strengthen yesterday against the Dollar and is trading around $1.2289/E. What is ironic is that if the ECB does act it will be in the form of expansionary monetary policy which works against the strength of the Euro. I understand that positive news is reflected in both the equity and currency markets at this point in time after Europe having been hit hard with so much bad news. But one mustn't forget what drives a currency stronger. And ECB intervention isn't one of them. So whilst maybe reducing exposure to some dollars before the ECB meeting next week, I would just offload a small percentage, less that 50% of my exposure.
Next week there is also the Fed meeting. If the Fed announces further easing, this too should be negative for the dollar but a plus to the US economy. You see, if you hold dollars and the Fed does QE3, the dollar will weaken but the markets will rally. So holding on the Dollars would still prove not to be a bad idea.
I still continue to believe that investors should remain long this market but being exposed mainly to the US and China. Some exposure to European equities is warranted since they are trading on cheap valuations and let's face it, alot of companies trading in Europe are multinational companies so they only have limited exposure to Europe.
I attended a presentation organised by Fidelity yesterday. In a nutshell, a client needs to have exposure to China and to the US and has to be aware that there are alot of problems in Europe and needs to be diversified. What what said in the meeting is in line with our CC strategy.
Stock to watch: Facebook (Price $23.97, Citi's Price Target $35) (THIS IS NOT A BUY RECOMMENDATION – JUST AN OBSERVATION TO WATCH THE STOCK AND SEE HOW IT REACTS NOW THAT THE RESULTS ARE OUT)
Facebook Inc. shares fell as much as 12 percent in after- hours trading after its first earnings report. Operating margin, excluding certain costs, was 43 percent in the second quarter, a decline from 53 percent a year earlier.
For further information on Facebook or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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