Market Review
Market Brief – November 2011Source Bloomberg – Data as at 30th November 2011Another eventful month, dominated, as ever, by the (worsening) Eurozone debt crisis, saw a change of administrations in Italy, Spain and Greece, a “phantom” French downgrade and a failed government bond auction in, of all places, Germany. Meanwhile (perhaps most significantly), monetary authorities from across the globe embarked on a co-ordinated plan to ease tensions in the money markets by providing unlimited liquidity to a European banking system starved of Dollar funding. In contrast to the mood that prevailed over much of the period, most corporate and economic data (notably from the US) continues to surprise on the upside. Though a strong rally during the final trading sessions was not sufficient to lift them into positive territory, risk assets nevertheless ended the period well above their intra-month lows.Fig. 1 VIX Index of US Market VolatilitySource BloombergEquity MarketsThe volatility that has been a feature of equity markets for much of the year showed no sign of abating during November (Fig 1), which ended with most indices in red numbers. In the UK for example, the FTSE 100 recorded its longest losing streak for more than eight years, suffering nine consecutive daily declines totalling more than 400 points (7.5%), before recovering all but 40 points of that drawdown in the last four days of the month to end down 0.70%. This was a pattern repeated across western markets, where sizeable losses were pared by a welcome late bounce. While the US was also one of the minor casualties among the major markets (S&P500 – 0.51%), European bourses fared less well (FTSE Europe ex-UK -2.35%). Further afield, Japan’s Topix Index dropped 4.66%. Elsewhere in Asia and the wider developing world, the falls were bigger still: the FTSE Pacific (ex-Japan) Index ended the month down 7.36% and the MSCI Emerging Market Index off 6.70% in Dollar terms, to extend that benchmark’s underperformance of its mainstream counterpart over the year to date (Fig 2). Fig 2. Developed vs. Emerging Markets during 2011.Source BloombergIn spite of their volatility and proven ability to deliver pain at regular and often extended, intervals, we continue to view equities as the most attractive area of investment, based on their superior fundamentals relative to all other asset classes. Fixed InterestUS and UK sovereign bonds benefited once again from the weakness in equity markets, with yields on ten-year Treasury and Gilt issues declining 5 and 13 basis points over the month (to 2.12% and 2.44%) resulting in gains of 0.43% and 2.25% in their respective Bloomberg Government indices. For once, this move was not replicated in the Bund market, where a lack of demand for German paper resulted in some €2.5billion of a €6bn ten-year bond issue failing to find buyers at auction. This surprise outcome served to undermine confidence in bonds of the Eurozone’s senior members even further, after Standard & Poor’s had mistakenly announced to some of its subscribers that it was downgrading French debt earlier in the month. Happily, S&P’s swift retraction, their reiteration of France’s AAA rating and announcement of an investigation into the “mistake” (timing perhaps?) were sufficient to restore the yield spread on French OATs relative to German Bunds to the levels seen at the beginning of the month, after they had widened by more than 80bps at one point. Bloomberg’s European Government Bond Index ended the period down 2.96%.Elsewhere within the Eurozone, conditions within peripheral markets worsened further, as a spike in the yields of both Italian and Spanish bonds sent their borrowing costs towards the 7% threshold that had previously triggered the likes of Greece, Ireland and Portugal to seek bailouts. Indeed, while Spain’s benchmark ten-year yield had fallen back from a peak of 6.78% to “only” 6.23% by the month-end (up 72bps), the Italian equivalent had climbed into the “death zone” with a yield of 7.53% (+165bps). As a further indicator of the Italian market’s precarious state, the crossover of the yield on its two-year debt above that of the ten-year’s echoed the moves seen in those other bailout recipients’ bonds (Fig 3). Fig 3. Italian Government two year bond yield vs. 10 year bond yieldThere was a significant divergence between the performances of different areas within the credit space, where Emerging Market yield spreads tightened versus their US Treasury counterparts over the month. Corporate spreads, by contrast, were dragged wider as a result of significant falls in the price of financial issues, which represent a significant proportion of the broader investment grade indices. As a consequence, the hybrid iBoxx Indices lagged their government equivalents in the US and UK, with returns of -0.08% and +0.96% over the month respectively. Again, it was a different story in Euros, where non-financial corporates’ outperformance of peripheral sovereigns resulted in a marginal improvement in the iBoxx’s relative return.CurrenciesNot for the first time, the Dollar became the “go to” currency during this latest “risk-off” episode and gained ground against all major currencies bar the Japanese Yen – the DXY Dollar Spot Index was up 2.91% for the month even after a correction during its latter stages (Fig 4). Fig 4 – Dollar Spot IndexSource BloombergWith the Swiss Central Bank having thrown its lot in with the Euro back in September, by way of a declared intention to track the common currency, the once mighty Franc has begun to behave much like any other currency of late – indeed, it was one of the largest fallers over the month in Dollar terms (-4.32%). Dare we tempt fate, but some of the “Swissy’s” safe haven status would appear to have been inherited by the good old British Pound, which has become one of the more stable currencies during these volatile times. CommoditiesWhile most commodities ended November at lower levels, Crude Oil stood out as the largest gainer over the period, as the “front month” future price of a barrel of West Texas Intermediate climbed above $100 for the first time since June, for an increase of 7.69%. As the chart below shows, the strong rally during the quarter to date represents a pronounced breakout from its recent downward trend (Fig 5). This rise was due in part to signs of a reversal of the inventory build-up in the US and forecasts of lower production from non-OPEC sources.Fig 5. WTI oil priceSource Bloomberg