In the US trends remain negative in manufacturing as inventories have started to rise vis-à-vis sales and new orders. The evidence from consumption and real estate markets remain positive. In the Eurozone the theme of marginal improvements within an overall negative trend continues, while developments in the institutional framework of the EZ remain gradual and incomplete. In China, the Central Bank, in an effort to shift liquidity from the 'shadow' banking system to the traditional one is causing a spike in short-term funding costs while the economy continues to slow.
In the past month, there has been a deterioration in the investment climate. We regard market reaction to the Fed’s announcements as excessive. The improvement in the labour market is marginal, while the inflation trend remains downward. It is likely that markets will only gradually converge to a higher level of volatility as they start to discount a measured reduction in liquidity, without creating a rising volatility trend with duration and intensity which would cause greater overall market pressures.
For equity markets, we estimate a relative improvement in the fundamental picture of emerging vs developed markets, but the technical picture remains negative, mainly because of many unquantifiable factors (social unrest in key emerging economies). In parallel, commodity prices (especially gold) appear now more fairly valued, except for oil which probably incorporates a sizeable geopolitical premium. In bond markets longer maturities now appear fair to cheaply valued relative to shorter maturity ones, which remain very expensive in an absolute sense. The euro, despite maintaining a generally neutral picture, remains exposed (along with other markets) to a probable rekindling of the crisis in the Eurozone and to a (gradual) normalization of US monetary policy.