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Monthly Review: May


In an environment of moderate economic growth internationally, market attention has recently been focused on quantitative easing, mainly in the US, which in combination with equivalent policies in the United Kingdom and Japan has led to significant returns on equity markets of developed countries. Many of these equity indices are overbought and are trading at levels higher than those of 2007 (US).

As concerns about the withdrawal of monetary stimulus emerge in the US, it is likely that volatility will rise resulting in pressures on these markets. We expect that these will be short-lived. The high and gradually declining unemployment rate in the US, along with the downward trend in inflation are a perfect combination in terms of maintaining ultra-loose monetary policies. In addition to this we expect that US consumption will retain its recent positive trend with possible upward surprises in growth. Equity valuations are also more favourable than in 2007.

In the Eurozone, sentiment remains positive as the economic data, although negative, remain on a trajectory of marginal improvement, while markets continue to remain very optimistic about both economic growth and the resolution of the Eurozone crisis. It is likely that the German elections have imposed a pause in the usual dialectic on Eurozone governance matters resulting in a (partially, at least) non-sustainable decline in volatility.

The economic data in China, and other emerging countries, remain neutral to negative as the country tries to settle on a growth trajectory over 7%, while markets do not appear to have yet fully discounted this process. Thus, although emerging market equities are considered cheap, they display a relatively negative technical picture. Commodities and especially oil, display a particularly negative overall picture.

The recent upward pressures on Treasuries yields that is happening in parallel with falling inflation expectations in the US, is producing higher real yields, rendering bonds less expensive, and supporting the dollar and equities, while it increases the pressure on commodities and particularly gold.