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Monthly Review: August

The manufacturing sector in the U.S. surprised positively and data for new orders, sales and inventory advocate the preservation of these new higher activity levels, which could indicate an acceleration of growth and corporate profitability in the U.S. and the rest of the world.

The Eurozone is likely to have entered a stage of more meaningful improvements in economic data. Thus, in manufacturing the rise in the PMI index over 50 might suggest the end of the recent recessionary forces. Risks are focused, on whether potential political obstacles to the efforts for a deeper European integration, cancel recent improvements in business sentiment.

A lower pace of liquidity injection from the FED, that is a result of growth improvements, should result in a gradual convergence to a higher volatility level resulting in a temporary only increase in market pressures. We could be at the beginning of such an adjustment that could be magnified as geopolitical risks escalate and Eurozone ones resurface. In the longer term, healthy economic growth should result in the maintenance of the upward trend of risky securities with parallel pressures in bonds of mainly lower duration. Risks are concentrated in an overshooting and stabilizing of oil (crude) above $110 which would amount to a stagflationary shock and also in an excessive increase in U.S. long-term interest rates.

The sharp rise in long-term yields, without a corresponding increase in profitability or in the velocity of circulation of money, renders the S&P500 expensive. At the same time, the index remains significantly higher than the level implied by its co- variation with other international markets. The technical picture however remains positive. Emerging market shares have become cheap but their technical picture has deteriorated significantly. The overall picture for equities has deteriorated to neutral with a negative predisposition.

The EURUSD economic fundamentals have improved, but risks of peripheral spreads widening and the general uncertainty surrounding the issue of closer European integration remain. Geopolitical concerns have made the oil price unreasonably high, but the technical picture remains positive. The overall outlook for gold remains negative. In bond markets, longer durations in the U.S. are considered cheap compared to shorter ones, while the overall picture is negative for American and neutral for German bonds.