Subsiding Greek fears give equities firmer footing
Thursday, 11 March 2010
Dave Shellock
Easing tensions over Greece, fresh signs that the global recovery was holding up -- notably on the US jobs front -- and a lack of negative news on central bank exit strategies provided a solid backdrop for financial markets early this month.
Equity, credit and commodity prices rallied across the globe, while core government bond prices relinquished some earlier gains.
A key indication of the mood came from the Vix equity volatility index, widely watched as a gauge of risk aversion. The index was on track for a weekly fall of 10 per cent, which would leave it within a single point of a 20-month low struck in January.
Nicholas Colas, chief market strategist at BNY Convergex, argued that the decline in the Vix was related to a tightening of correlations between asset classes.
"Simply put, everything is moving in the same direction lately - to the upside," said Mr Colas.
He added that as perceptions of risk declined, intraday price moves became smaller and interest in risk management through options strategies diminished.
"Until there is an exogenous shock or central banks move to reduce global monetary stimulus, higher correlations and lower volatility will likely be the order of the day," he said.
Confidence in the markets was bolstered by the latest news that US non-farm payrolls had dropped by 36,000 last month, much less than some in the markets had feared.
"Employment is now very close to stabilising - although, eight months after the recession in output ended, that is hardly cause for celebration," said Paul Ashworth at Capital Economics. "The labour market is still a lot weaker than we would have hoped given the strength of GDP growth. Net job gains are not far off now, but this is still a comparably jobless recovery."
Nevertheless, the report -- in tandem with robust service sector activity figures released earlier -- provided encouragement to equitymarket bulls.
Confidence among investors was bolstered by a fresh round of austerity measures in Greece -- which helped pave the way for a successful issue of euro 5.0bn in 10-year government bonds.
Axel Merk, chief investment officer at Merk Investments, said that while Greece was not out of the woods, it was taking necessary steps to regain the market's confidence.
"A process of normalisation can begin where Greece will ultimately be seen for what it is: a struggling country comprising 2.0 per cent of the eurozone GDP," he said.
Greece's five-year credit-default swaps, a measure of the cost of insuring against the country defaulting on its debt, plunged 70 basis points in the first week of this month to 301bp, according to Markit data. The spread between Greek and German 10-year government bond yields -- the risk premium demanded by investors to hold Greek debt -- narrowed more than 30bp.
In currencies, sterling was given a rough ride as the outlook for UK fiscal policy came under scrutiny amid fresh signs that a hung parliament was the most likely outcome of the forthcoming general election.
The pound slumped through the $1.50 level to a 10-month low of $1.4784, further undermined by news of UK insurer Prudential's proposed $35bn acquisition of AIG's Asian operations - much of which would be in cash. Elsewhere, the euro remained under some pressure, slipping 0.2 per cent against the dollar.
The European Central Bank left interest rates unchanged at its latest policy meeting but continued to "normalise" liquidity policy - albeit at a very gentle pace.
"Overall it seems that the ECB wanted to show some support for Greece and for those eurozone politicians that have pledged help for Greece," said Steve Barrow at Standard Bank.
"But there is a big difference between the sort of support that the ECB is giving now, and the support it might have to give if deficit cuts in Greece and elsewhere crimp growth and send inflation down."
Elsewhere, the Australian dollar rose after interest rates were raised for the fourth time in the current cycle, while a modestly hawkish tone from Bank of Canada helped its currency rise. But the yen fell amid speculation that the Bank of Japan might loosen policy further.
Commodities staged a broad rally with US crude oil briefly climbing above $82 a barrel, copper rising 4.5 per cent and gold gaining 2.2 per cent.
Easing tensions over Greece, fresh signs that the global recovery was holding up -- notably on the US jobs front -- and a lack of negative news on central bank exit strategies provided a solid backdrop for financial markets early this month.
Equity, credit and commodity prices rallied across the globe, while core government bond prices relinquished some earlier gains.
A key indication of the mood came from the Vix equity volatility index, widely watched as a gauge of risk aversion. The index was on track for a weekly fall of 10 per cent, which would leave it within a single point of a 20-month low struck in January.
Nicholas Colas, chief market strategist at BNY Convergex, argued that the decline in the Vix was related to a tightening of correlations between asset classes.
"Simply put, everything is moving in the same direction lately - to the upside," said Mr Colas.
He added that as perceptions of risk declined, intraday price moves became smaller and interest in risk management through options strategies diminished.
"Until there is an exogenous shock or central banks move to reduce global monetary stimulus, higher correlations and lower volatility will likely be the order of the day," he said.
Confidence in the markets was bolstered by the latest news that US non-farm payrolls had dropped by 36,000 last month, much less than some in the markets had feared.
"Employment is now very close to stabilising - although, eight months after the recession in output ended, that is hardly cause for celebration," said Paul Ashworth at Capital Economics. "The labour market is still a lot weaker than we would have hoped given the strength of GDP growth. Net job gains are not far off now, but this is still a comparably jobless recovery."
Nevertheless, the report -- in tandem with robust service sector activity figures released earlier -- provided encouragement to equitymarket bulls.
Confidence among investors was bolstered by a fresh round of austerity measures in Greece -- which helped pave the way for a successful issue of euro 5.0bn in 10-year government bonds.
Axel Merk, chief investment officer at Merk Investments, said that while Greece was not out of the woods, it was taking necessary steps to regain the market's confidence.
"A process of normalisation can begin where Greece will ultimately be seen for what it is: a struggling country comprising 2.0 per cent of the eurozone GDP," he said.
Greece's five-year credit-default swaps, a measure of the cost of insuring against the country defaulting on its debt, plunged 70 basis points in the first week of this month to 301bp, according to Markit data. The spread between Greek and German 10-year government bond yields -- the risk premium demanded by investors to hold Greek debt -- narrowed more than 30bp.
In currencies, sterling was given a rough ride as the outlook for UK fiscal policy came under scrutiny amid fresh signs that a hung parliament was the most likely outcome of the forthcoming general election.
The pound slumped through the $1.50 level to a 10-month low of $1.4784, further undermined by news of UK insurer Prudential's proposed $35bn acquisition of AIG's Asian operations - much of which would be in cash. Elsewhere, the euro remained under some pressure, slipping 0.2 per cent against the dollar.
The European Central Bank left interest rates unchanged at its latest policy meeting but continued to "normalise" liquidity policy - albeit at a very gentle pace.
"Overall it seems that the ECB wanted to show some support for Greece and for those eurozone politicians that have pledged help for Greece," said Steve Barrow at Standard Bank.
"But there is a big difference between the sort of support that the ECB is giving now, and the support it might have to give if deficit cuts in Greece and elsewhere crimp growth and send inflation down."
Elsewhere, the Australian dollar rose after interest rates were raised for the fourth time in the current cycle, while a modestly hawkish tone from Bank of Canada helped its currency rise. But the yen fell amid speculation that the Bank of Japan might loosen policy further.
Commodities staged a broad rally with US crude oil briefly climbing above $82 a barrel, copper rising 4.5 per cent and gold gaining 2.2 per cent.