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Monthly Review: February


  • After a period of extremely low and declining volatility, we expect a significant increase in the likelihood of heightened fluctuations in international markets as investors reassess the factors affecting them. We are not expecting a change in the existing long-term trends.
  • At the macro level, in the US a period of negative surprises is likely, centred on the manufacturing sector, while investors are likely to become increasingly anxious about exit scenarios from the Fed's monetary easing strategies. However, the turmoil on these fronts is not expected to derail the broader growth dynamics.
  • After a positive second half of 2012, political developments, starting with the elections in Italy, are likely to lead investors to form a more realistic picture of both the process of deeper European integration and the broader growth prospects in the Eurozone.
  • In Japan, the yen-weakening occurs as a consequence of an internationally acceptable effort on the part of the Japanese government to guide the country out of deflation, a positive development for the international economy. In China, the transition to a consumer model remains uncertain, but we maintain that the likelihood of a positive surprise remains significant. At the same time, the downward trend in inflation is expected to prevent a substantial monetary contraction in the effort to cool down the real estate market.
  • We observe deterioration in the overall picture for risky assets with a parallel improvement in the (primarily technical) picture for bond markets. We note the significant deterioration in our assessment of commodity markets. We hold a negative assessment of crude oil, while gold has lost its positive technical picture and remains overvalued. For German bonds we observe a significant improvement in the technical picture, with a marginal improvement in the fundamental one. The overall picture remains marginally negative. The high Eurozone trade surplus of offers support to the EURUSD.