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Monthly market round up: My big fat Greek meddling

After the pain and volatility suffered during August and September, October actually turned out to be a good month for investors, as equities in particular shrugged aside yet further early month losses to recover strongly. So strongly in fact that in many cases they posted their biggest one month gains since the summer of 2009. The FTSE 100 rose by 8%, the US indices by 9% and the previously underperforming German DAX and French CAC 40 by 12% and 11% respectively. Elsewhere Russia rebounded by 16% and Brazil by 10%, the latter by more in sterling terms, performance we had suspected may be on the cards but weren’t quite brave enough to take advantage of, sorry.

Government debt issued by supposedly ‘secure’ nations fell in value as yields rose, whilst industrial metals and oil prices also rebounded, indicating a more confident outlook, or perhaps that should just read a ‘less pessimistic’ outlook. More fortunately for us, corporate debt rebounded strongly in value towards the end of the month as confidence improved and sanity started to return to bond markets.

Global economic data throughout the month was perhaps better than expected, albeit that none of it could be described as particularly positive, however, as always it was developments in Europe that dictated the direction of sentiment.

Early in the month Angela Merkel and Nicolas Sarkozy, the German and French leaders announced they had a plan to address Europe’s sovereign debt issues on a more sustainable basis. That ‘plan’ (we’ll call it Plan 1) was to come up with a ‘plan’ (we’ll call this Plan 2) before the end of the month. At that point not the most inspiring idea we’d ever seen but one markets reacted well to. As the end of the month and EU summit approached, markets continued to make positive ground on hopes the Europeans would dream up a resolution that might actually work for once. Delayed meetings and setbacks refused to rattle investors and after the announcement of Plan 2 was made, markets jumped for joy, the French and German indices posting gains of around 6% each on the day.

In our minds, Plan 2 was full of ideas but lacking in substance. In brief, it agreed to write off half of the Greek debt held in private ownership (you will note at this point that the EU and IMF etc do not have to suffer any losses), recapitalise the European banking system (required due to impending Greek debt losses) and have the ammunition and mandate to buy other sovereign bonds, such as Italian and Spanish, in order to keep their yields low and allow those nations to efficiently access capital markets for funding requirements.

That all sounded very good, so how will this be financed and once that is agreed does it become Plan3? Well the Eurozone leaders also agreed that they would leverage the region’s Stability Fund (i.e. borrow money from other entities) to the tune of €1 trillion and insure those lenders against the first 20% of any subsequent losses. So no physical injection of funds from Eurozone nations themselves yet, and the holes in Plan 2 are beginning to become more clear. So who will lend the €1 trillion? Almost instantly there was an assumption by European leaders and investors that China would come to the rescue, a huge assumption as €1 trillion represents over a third of the Asian powerhouse’s total currency reserves.

EFSF head Klaus Regling jumped straight on a flight to the most populous nation in the world with his charity tin and was perhaps underwhelmed when China very shortly indicated it ‘may’ invest up to €100 billion, but that the West would need to stop its criticism of Chinese currency policy. Again this was a worrying hole in Europe’s plan (Plan 2), indications of possible support from South Korea and possibly Brazil too were encouraging, but neither are likely to come close Chinese levels of investment. With the financing of Plan 3 unresolved markets drifted off their peaks but nothing more, but there was a twist in the tale of what had otherwise been a good month.

Greek Prime Minister George Papandreou announced he would hold a referendum with his voters on whether they wanted to accept the terms of the latest bailout, one he himself had agreed just days earlier. As we write the ramifications of this are still developing. His cabinet have backed him, but other party members are defecting, a vote of no confidence is planned and the country may not even have a government by the time we distribute this note. China is refusing to commit to any package whilst this uncertainty remains, a tranche of €8 billion due to Greece in the next fortnight so it can fulfil its short term needs has been suspended and Italian and Spanish economies are once again subject to vulnerability.

The purpose of these monthly commentaries was to summarise recent events and hopefully telegraph future investment decisions, strategies and views to our investors. Unfortunately at this point in time it feels impossible to predict as the fate of financial markets is very much in the hands of politicians, fundamentals and value are cast aside and the future performance of assets is as binary as the decisions about to be made. Resolution will be hugely favourable, even if that resolution is to eject Greece from the Euro, swallow the losses and move on with restructuring the rest of the region. Continued uncertainty is the danger, markets do not like the unknown and another month or two of waiting for referendums will not sit well with them, especially if it delays the implementation of Plan 2, or was it 3?

nb: Sure enough whilst waiting Compliance approval to distribute this note Papandreou has reversed his referendum decision. The political situation in Greece remains unstable and will no doubt have changed by the time you receive this.

Important Legal Information

Opinions constitute our judgement as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment and the income from it to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation.

This was posted in Bdaily's Members' News section by John Dance .