Chris Weafer's Investor Notes (208)
If you don’t know where you are going you’ll end up someplace else.
Yogi Berra
“Schopenhauer was right. Life without pain has no meaning. Gentlemen, I am here to give your lives… meaning.”
Dr Lindstrom (Red Dwarf)
A Year of Positives and Negatives
An optimist stays up until midnight to see the New Year in. A pessimist stays up to make sure the old year leaves.
Bill Vaughan
Positives and negatives in 2012
There were quite a number of events last year, some represented positive developments while others can be considered negative. The list below breaks the more important events into several theme categories and lists the positives and negatives for each.
The US dollar came under pressure late last week and, if sustained, will further boost the appetite for EM assets while providing support for oil and metals.
It does not do to leave a live dragon out of your calculations, if you live near him.
J.R.R. Tolkien, The Hobbit
> The US budget is a problem, but other factors look better. The global market context will again be tightly focused on Washington and the negotiations to resolve the budget talks before the year-end deadline. Late last week, both sides warned not to expect a quick resolution with President Barack Obama referring to "prolonged negotiations" ahead and Speaker of the House John Boehner saying "Right now we're almost nowhere" on talks. Thus, the issue will very likely hang over markets until 2012 closes. However, that does not preclude further advances in equities in the meantime, as US and Chinese economic reports show improving conditions and the near-term threat of an escalation in the Eurozone crisis seems to have passed. Today's manufacturing surveys in major economies will set the tone for the start of the week, while the US payroll report will determine the mood as this week ends.
Russian markets have lagged the MSCI EM Index since mid-September, but are about to correct. Russian markets have lagged the performance of other big emerging markets since mid-September, average daily volumes are lower than usual and fund flows into Russia retail funds, which not long ago were running well ahead of flows into other big EM country funds, have reversed. This week, we look at the reasons for the reversal of sentiment toward Russia and differentiate between invalid headlines and legitimate concerns. We conclude that the Russian indexes have not moved out of line, but rather the Asian indexes have outperformed as investors switched funds into the region ahead of the leadership change in China. Given that no new economic stimuli were announce at last week's congress, those flows are more likely to reverse back out and into other EM funds in the coming weeks.
Nervous wait for Wall Street is most likely. Equities and the ruble have opened moderately weaker today after US markets closed near the session low on Friday. This came about as investors became more nervous about the growth outlook and prospects for further progress in efforts to solve the Eurozone crisis. But fears that we may be heading into another big sell-off in risk assets look excessive. Asia's markets are off only slightly this morning, while commodity prices have rallied a little from the Friday weakness. Brent crude traded up $0.3/bbl to $110.5/bbl in early Asia trade. Still, investors will adopt a very cautious stance this morning until they see how US markets follow though at the opening today. If there is a bounce later today, then the stocks that fell the most on Friday will lead it, e.g. Evraz and Mechel (both off 4.1% on Friday). However, these are still the stocks most at risk in the event that Wall Street falls further.
More cautious start to the new week. Equity markets will start weaker today to reflect the failure of US indices to sustain last Friday's initial momentum after the better than expected payroll report and as China's markets return from a weeklong holiday with greater caution. Japan's markets are closed for a holiday, and the rest of the Asia-Pacific region is trading almost 1.0% lower. Brent crude ($111.55/bbl) and most other commodities are trading 0.5% lower at the start of trading. US equity markets will be open today, but the Columbus Day holiday means that the bond market and banks will stay closed. We are likely to see a generally quiet session today while investors psych up for a hectic week of politics and policy meetings.
Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment. Buddha
Slight nervousness but positive momentum intact. After such a strong bounce in markets over the latter part of last week, we may encounter some reluctance to follow through today. This is evident in mixed trade across Asia this morning. But while few believe that the measures announced represent the needed major structural changes in the global economy, the level of coordination and determination shown on both sides of the Atlantic over the past 10 days can keep confidence high and generally sustain positive momentum. The odds on setting a new market high for 2012 are very good. In Asia trade this morning, Chinese markets are lower on concerns over the outlook for growth and because of the threat of an escalation in the dispute with Japan. The Tokyo bourse is closed for a holiday and other Asian markets are only marginally better. Brent is also a little lower but consistent with the drift lower we see elsewhere so far this morning. We reprint below the scenario analysis (from our recent report "Strategy Quarterly - Russia's Conflicting Personas" of September 14) for global markets and the trickle down to Russia sentiment and the RTS Index.