Yet another Greek impasse, a French downgrade, ongoing DC cliff dodging and a downturn in Citi’s G10 economic surprise index (though not yet in the US one) could have been plausible reasons this week to extend the post-election global markets swoon. But at 8 consecutive days in the red up to last Friday, that was the longest losing streak since last November, and a lot of froth had been shaken off these year-end markets already.
We’ve seen a decent bounceback in nearly all risks assets instead. That may be partly due to volume-sapping Thanksgiving week and partly due to the fact that more and more funds think the year is effectively over now anyhow. The only big wildcard left is the timing of an fiscal agreement stateside and few managers now honestly believe there won’t be some sort of a deal. (Deutsche, for the record, said this week that the divide between the sides over tax is much less than many assume). Greece is a slower burner but again, few people believe it will be hung out to dry any time soon and a deal on the next tranche – whatever about deep and meaningful OSI, payment moratoriums and loan rate cuts – will most likely be reached next week at the latest. Talk of a EFSF-funded Greek debt buyback meantime has helped pushed its debt yields to the lowest since the restructuring. And the French downgrade was probably the least surprising move of the past five years.
So we’re left closing out a half-decent investment year with a view of early 2013 that is framed by a Chinese cyclical upswing, a likely additional fillip to business planning from a US fiscal deal on top of an already brisk housing recovery there, and the likely return of one the euro bailout patients, Ireland, to the syndicated dollar capital markets almost a year before its bailout programme ends. Further into the year gets much trickier as usual, with elections in Germany, Italy, Israel and Iran to name but four… but as Bernanke reminded us this week and every investor experienced in full voice in 2012, the central banks are heavily committed to reflation policies now and will not stand idly by if there’s yet another serious downturn.
The Israel/Gaza conflict was more jarring as a backdrop over the past week, but markets again failed to show a major react. The assumption was the violence could be contained and Wednesday’s ceasefire seems to have borne that out. At about $110, Brent is only smidge higher than it was this time last week.
As for the rest, there’s been a decent bounce in equities, Treasury/bund yields and the euro and an easing back of peripheral euro borrowing rates. Equity and FX volatility gauges are still rock bottom, meantime.