Market View - August 2009

"The fortune of the markets are writ in the charts" was the headline accompanying the article by The Times's Economic Editor Anatole Kaletsky in Monday's (July 27th) edition.

Anatole goes on to discuss the conundrum of global equity markets which have enjoyed a fortnight of encouraging gains, and in most cases their best run for several years. This despite the earnings for bellwether US stocks such as Microsoft and GE being disappointing as well as some economic data being less impressive than last month when the markets fell sharply.

Anatole concludes that while fundamentals have been less than persuasive during July, the technical data has been compellingly positive with the S&P completing an "inverted head and shoulders" formation as it powered through the all important resistance level of 972 last week. Based upon Friday's (July 24th) close which was comfortably higher at 979.26, the technicals suggest that we could be in for a rewarding run all the way to 1323 on the S&P 500.

In the UK, the FTSE 100 enjoyed its 10th straight gain on Friday and if it can close higher Monday (27th July) it will have equaled its best ever run winning streak in its 25 year history. Regardless of whether it is fundamentals or technicals that is driving global markets, the rally which has continued in developed Western markets since the lows of March has seen the S&P 500 climb more than 45% from its low 676.53 on the 9th March, although it still remains more than 37% lower than its peak in early October 2007 (source ft.com).

Coming back to fundamentals however, we must remain cautious as an article in this week's Economist titled "Unpredictable tides" reminds us. According to the World Bank, the dollar value of global trade is about a third lower than it was a year ago, and Barry Eichengreen, an economic historian at the University of California, Berkeley, estimates that trade has contracted by more in this crisis than it had at a comparable stage of the Depression.

The Economist article goes on to say however that the decline in trade has bottomed out and the World Bank even suggests a small uptick occurred in June. The key to how quickly global trade can recover is dependent both upon an increase in global demand and a determination by governments to resist protectionism in the face of increasing unemployment.

Just as worryingly Monday's (July 27th) FT front page headlines included "Europe braced for rising credit card defaults". This is based upon estimates from the International Monetary Fund that 14% of US consumer debt totaling $1.9 trillion will turn sour, while 7% of the $2.5 trillion consumer debt in Europe is likely to default with much of that falling in the UK, being the continent's biggest credit card borrowing nation.

The FT warns that "as unemployment continued to rise and house prices kept falling, the rate of defaults surpassed historic norms, rendering many of the computer models used by US banks to predict losses useless; in this phase of the credit crisis, lenders are flying blind." So is the worst of the recession over as the current trend of global equity markets appear to suggest, or are the views of numerous bears who warn of a double-dip downturn later this year prompting global equity markets to revisit March lows correct?

As always it pays to proceed cautiously as in the words of Nassim Nicholas Taleb (and not Donald Rumsfeld whom many of us erroneously thought to have been responsible for the origin of the immortal line), there are known knowns, known unknowns and unknown unknowns!