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Monthly Review: March


  • Despite the recent rise in uncertainty in the Eurozone (EZ), markets have reacted only marginally, maybe because complacency has set in due to the fact that, after three years of crisis, a process of institutional integration is now underway. This framework, however, will not cover past losses and as these are being dealt with (Cyprus), we are likely to find ourselves in a period of heightened uncertainty. Markets probably underestimate at this stage the major obstacles involved in the implementation of the agreed framework. Moreover, the persistence of tight fiscal policies continues to cause economic deterioration in the EZ.
  • In parallel with developments in the EZ, the performance of the Chinese economy is another cause of uncertainty. The first economic indications of 2013 were disappointing, exacerbating concerns in emerging equity markets and commodities.
  • The combination of positive surprises in the US economy and the Fed’s decision to maintain the intensity of its quantitative easing policies counterbalance concerns about China and the Eurozone and, if continued, could cause overheating of US markets mainly, as the data in the rest of the world still do not provide an excuse for attracting any excess liquidity. In this context, US monetary policy remains a potential source of volatility, not only with respect to the rhetoric of exit strategies, but also in relation to the factors behind possible changes in the Fed’s stance (growth or inflation).
  • The result of these forces is an “asymmetrical” movement of markets, as we observe strong growth in US equity markets, weak emerging market equities and commodities, along with strong German government bonds. Compared to the previous month, we note an improving technical picture for US shares (with a marginal deterioration in the fundamental picture), a significant improvement of the technical picture of Bunds, a marginally improving fundamental picture for the euro and significant overvaluation (deterioration in the fundamental picture) in the price of crude oil.