Volatile markets persist
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Europe continues to dominate investor sentiment. After a lull in the early part of the year, during which markets were boosted on a wave of extra money from central banks, the more optimistic tone has given way to increased fears over the future of the eurozone and the impact of the ongoing crisis on global economic growth.
The recent focus on Greece has been a distraction from the more serious crisis which is surrounding Spain. The primary concern is the damage being caused by the near-insolvent Spanish banking sector on the Spanish sovereign. The recently announced €100bn (£80.2bn) banking “assistance” package appears to have already been overtaken by events – the concern being that with bond yields at or more than 7 per cent for 10 year borrowing, Spain cannot access financial markets for funding on a sustainable basis.
While Europe continues to dominate the headlines, looking further afield the outlook is considerably brighter – although data from both the US and China has at times been weaker than expected. It is clear, however, that central banks are ready to use monetary policy to further stimulate economies as they see fit, and have already seen further stimulus measures in the UK, along with rate cuts in China and the extension of Operation Twist in the US.
Taking all of this into consideration, investors’ appetite for risk is unlikely to increase while we are under the cloud of the European debt issue. The longer and deeper this crisis becomes, concessions being made by politicians to move the eurozone out of crisis mode are likely to increase.
The European Central Bank’s role with its current mandate is quite constrained, and the onus really is on the politicians to come up with a solution to convince an increasingly sceptical market that they have the ability to get ahead of events.
Nonetheless, amid all this gloom we can still see positive outcomes this year, although political and central bank intervention will be required and the timing and scope of any news on this is very hard to predict. Until then, trading is likely to remain thin and volatile markets will persist.
Rob Burdett is co-head of multi-manager at F&C Thames River