It’s been another uncomfortable week as markets continue to bounce around on the back of newsflow from the Eurozone.
The risk-off trade appears to be in full swing as equities ended the month down whilst the yields on offer from the sovereign debt of the perceived safe havens of the US, UK and Germany continue to break through historic lows. Whilst we wait for the Greek election to take place, equity markets have ticked up and down dependent upon the standing of the pro bail-out parties in the polls.
However, it is news emanating from Spain that is introducing additional and unwelcome pressure on both the Eurozone and markets generally. The Spanish banking sector is clearly in trouble and the Spanish government is not best placed to help out, given the current yield it must pay to raise capital from the market. It needs help from outside, which doesn’t appear to be forthcoming at present.
The future of the Eurozone lies with the policy-makers but the silence on that front is deafening. There is little point attempting to second guess their next move though and so we find ourselves in a brief hiatus. Markets are moving on speculation and uncertainty, as well as low volumes, and that creates inefficiencies and opportunity. The future longer term direction will depend on the credibility of any proposed solution, or lack thereof, and until that becomes more evident markets will remain finely poised, despite the short term volatility. Germany appears to hold all the cards in this regard. There are noises that their current no compromise stance is softening. They may be waiting for the next round of elections in Greece, Ireland and France before showing their hand. That may be a wise strategy but a great deal is expected and there is a lot to be done.
We have made no changes to our stance or our portfolios this week. This seems sensible as little has fundamentally changed from last week. The trading strategy we have adopted on the periphery of our portfolios to smooth out some of the effects of short term volatility – selling sovereign debt on the upward tick and buying equities at the dips with a view to reversing that position at the upper end of our trading range – appears to be the consensus trade as equity markets continue to bounce back from falls, slightly above our own target floor.
Oliver Wallin, 01 June 2012
Tags: banking sector | current yield | eff | elections in greece | eurozone | full swing | hiatus | inefficiencies | lows | periphery | place equity | portfolios | proposed solution | safe havens | sovereign debt | spanish government | term direction | term volatility | trading strategy | wise strategy