Europe’s Woes Disrupt Markets 26 March 2013 Market Rally Falters Slightly Stocks ended their multi-week winning streak last week as investors became uneasy over the banking crisis in Cyprus, a situation that had threatened to spill over into other parts of Europe. By Friday, however, signs were emerging that the island country would be able to secure a bailout, which prompted a market rally and lifted stocks. Ultimately, a deal was announced early on the morning of March 25 that should help secure Cyprus’ banking system and prevent a messy exit from the eurozone. For the week, the Dow Jones Industrial Average fell fractionally to 14,512, the S&P 500 Index declined 0.2% to 1,556 and the Nasdaq Composite lost 0.1% to close at 3,245. In fixed income markets, despite a long-standing expectation that rates are poised to rise, the yield on the 10-year US Treasury remained below 2%. Europe’s Problems Have Not Been Solved The past six months were relatively quiet in terms of the European debt crisis that had dominated investor attention through much of 2011 and 2012, but we saw a flare-up last week in the island nation of Cyprus. While Cyprus represents only a tiny portion of Europe’s overall economy (just 0.2% of gross domestic product), it is an important country to watch since its problems are indicative of a broader concern: the still-fragile nature of the European banking system. Cyprus’ problems emerged not due to profligate public spending, but, rather, because its banking system is too large relative to the size of its overall economy. The bailout that was announced early on Monday morning should help stabilize the country in the immediate term, and because the package is designed to shrink the size of Cyprus’ banks, it should provide some longer-term relief as well. As with the stopgap measures put into place throughout Europe over the past couple of years, however, the deal will certainly not solve all of the issues. Cyprus itself still faces a significant recession and Europe’s banking system as a whole remains undercapitalized and vulnerable to shocks. Although the European Union has technically agreed to tighter banking integration, the implementation has been slow. This remains a politically contentious issue, and with German elections pending in September, we are unlikely to see any real progress on this
front until late 2013 or early 2014. In the meantime, we should expect the European banking system to remain a source of systematic risk in the coming months. Bonds Eurozone bonds moved in step with developments in Cyprus. Monday saw something of a flight to quality. German and US bonds jumped, while yields in Spain and Italy rose sharply. However, as the week wore on, Spain and Italy showed some resilience and the 10-year yield in both countries actually fell a little over the week as a whole. German and US yields edged up a little on Friday but both markets showed an overall fall in yields for the full week. The net effect on the Merrill Lynch over 5 year government bond index was a rise of 0.8% over the week. Global Outlook Recent economic data hasn’t altered the picture that the general growth backdrop is ‘ok’ and reasonably supportive for risk assets. For example, the US is expected to grow by around 2% again this year, hampered a little by fiscal measures but a stabilising housing market may help consumer confidence. Analysts see eurozone growth remaining in mildly negative territory this year but this again masks divergences among countries and positive growth is expected to resume quickly thereafter. China, which dominates the Asian growth picture, is expected to grow around 8% in 2013, similar to last year’s rate. Inflation is seen to be a non-issue for investors again this year. A continuing loose monetary policy is regarded as an essential underpinning for the US and European economies and, for that reason, short rates are likely to stay at ultra-low levels for a protracted period to come. The Fed has made policy conditional on both the unemployment and inflation rates and, barring a major reversal, policy is expected to be very supportive. Other central banks are neutral in their stance or will ease further. For the ECB, the key issue is how the periphery develops over the year. Most analysts expect that the ECB will stay highly accommodative during 2013 as it continues to try to heal the peripheral debt crisis and support economic growth in the region. As long as central banks continue to ‘sponsor’ a low interest rate structure, the so-called ‘bond bubble’ in Germany and the US is unlikely to burst. Italian bond spreads have risen modestly as a result of the political uncertainty there but the knock-on impact to other markets has been very limited so far. Similarly, the immediate impact of the Cyprus situation has been very modest, albeit both situations have the potential for additional negative impact, if only in the short term. Positive investor sentiment on the periphery is now quite high and this always makes such situations more vulnerable to bad news flow; setbacks would not be unusual. Commodities Gold attracted some attention last week, having its best week in two months, as its safehaven status appealed to some nervous investors. It closed the week up 1%, at $1,607 per ounce. Copper, on the other hand, touched a seven-month low, unsettled by uncertainty over the global growth outlook. The Brent crude oil price fell for a second straight week, briefly dipping below $107 a barrel.
Currencies The euro behaved reasonably calmly in the face of the Cypriot situation, finishing the week just shy of 1.30 against the dollar. It weakened more than 1% against sterling, which seemed to gain from safe-haven flows (sterling gained against the US dollar also). Source: Bloomberg, Aviva Investment Managers, Zurich Investment Managers, & Blackrock
HOUSE VIEW PERFORMANCE Thomond Asset Management maintains an investment house view on how we feel your funds should be invested with each fund manager. Below we have provided you with the performance of each of these managers on an annualized basis.
Fund Manager Zurich New Ireland Standard Life Aviva Friends First
1 Year 9.33% 8.99% 8.51% 8.31% 8.17%
3 Year 20.76% 18.16% 23.96% 18.21% 14.90%
*Performance provided by Financial Express
Note: The performance of the above portfolios may not directly correlate to an individual’s portfolio. Please speak with your financial advisor to understand your specific portfolios performance.