Good morning,

Markets are called higher this morning. This is what's happening today:

  • Fitch Ratings said it sees significant risk of further capital outflows from the euro area;
  • Italy plans to auction E6.5b of 364-day bills today;
  • Greece prepares for general elections on June 17;
  • Economic reports today showed that Japanese machinery orders rose in April at more than three times the pace estimated by economists and South Korean unemployment fell to a four-month low;
  • U.S. retail sales probably declined 0.2% in May after rising 0.1% the prior month, according to the median estimate of economists in a Bloomberg News survey taken before data are released today;
  • Moody’s Investors Service said Australia’s economic strength is “very high.”;
  • 10-year Italian debt is yielding 6.032%, 10-year Spanish debt is yielding 6.508% and 10-year Portuguese debt is yielding 10.616%;
  • Brent is trading at $97.02.

The markets are called higher today though what will determine sentiment is the result of the Greek elections. Is is difficult to determine who will win the election because according to the polls the result will be very close. However as things stand, there is a good chance that Alexis Tsipras will win the election. He is a 38 year old who's goal is to keep Greece in the Eurozone though wants to re-negotiate the bailout package. Becuase of the lack of clarity as to who will be winning the election, expect further volatility in the markets in the next few days before the elections this weekend.

An interesting observation is the performance of funds compared to their benchmark. In Q112, 24% of funds beat their benchmark, making it one of the best years for active managers in the past 15 years. However things turned in Q212 due to worries of Spain and Greece and this lead to just 15% of funds beating the benchmark. This is the worst performance in years and it is compared to 2010-2011.

What's interesting however is that when funds start to sell off and become defensive, it is a signal that markets sentiment will start to change and this sell off will lead to bulls returning to the market in H212. Markets start to rise when everyone is net bearish. We are in for further weakness in the markets in the short run, however, the markets turn when most investors become bears and then we start seeing bulls come back to the markets. JP Morgans view is that a definite buy signal is if the VIX reaches a 30-40 level. The VIX is currently at 23.56. However, they also says it’s close to impossible to time the bottom and the current valuations offer attractive risk reward ratios.

Stock to watch: Amlin (326.7p, Price Target 435p)

During 2011 a number of issues affected Amlin culminating with a profit warning on the 2nd August 2011 and subsequent share price underperformance. We have remained on the sidelines throughout this period citing poor performance with the ACI business and relatively negative outlook for the London market business. We now believe Amlin has addressed the issues which led to the underperformance in 2011 and expect the results of this change to be reflected in the 2012 and 2013 P&L. Specifically we now believe the ACI business is on the cusp of turning profitable with many of the underwriting issues having been addressed over the last 24 months. We expect to see improvement in 2012 followed by underwriting profitability in 2013. Moreover the UK division which has disappointed recently is also turning the corner principally through its motor insurance unit with large rate increases being pushed through the book. We see conditions in the catastrophe reinsurance market remaining in relatively decent shape – this is an area in which Amlin is overweight versus peers. With relatively low balance risk and improving operational performance we rate this stock a Buy.

For further information on Amlin of other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli