25th May 2012
Cam Hui argues that while sentiment based indicators show panic, market based indicators have yet to register high panic levels: "What's bothering me is that while all these sentiment surveys point to excessive bearishness, market based indicators such as the VIX Index are not showing very much fear at all.
"Remember, (it's about) what they do, not what they say. While I have written before that this market is deeply oversold and due for a relief rally, these readings are suggestive that there is more downside before we see an intermediate term bottom."
So why is there not more panic around? Germany has said no to Eurobonds, which has swiftly removed one potential way round the crisis.
This blog on Zerohedge sums up the difficulties facing the Eurozone with brutal honesty:
"The consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum."
There appear to be two factors supporting equity markets or – at least – preventing a full scale panic. The first is that they have grown used to a policy response. Eurozone policymakers have always come up with something and investors are expecting the same again. taharqa11 says on the Seeking Alpha comment boards "After seeing repeat instances of central bank intervention there may be expectations that ultimately this will happen again. So why worry?"
Tim Stevenson, a director of pan-European equities at Henderson Global Investors, says: "I do believe we will see unprecedented market intervention over the next few weeks, possibly after the French Parliamentary Elections and the Greek Election (17th June). The current crisis is getting every bit as bad as the crisis we saw at the end of 2008, and the economic firepower at the disposal of governments (fiscal stimulus) and central banks (monetary stimulus) is a collection of batteries that look to be close to flat. But perhaps an agreement to abide by the ‘Handbook of how to run a Modern Economy' on a timescale that is extended to 10 years rather than 5, combined with Germany agreeing to throw greater support behind stimulus, all combine to restore a semblance of confidence to equity markets."
He points out that the LTRO came out of the blue and policymakers may surprise markets again with unorthodox monetary measures.
Also, equity markets are historically extremely cheap and overall weighting to equities very low. Stevenson says: "From a valuation perspective, European equity markets are at levels seen thirty years ago, ignoring the undoubted progress made by European companies over that time."
Of course, this is the equity market. It is a different story in the bond markets, where – it seems – there is genuine panic. Richard Milne in the FT labels it a 'bond run'. "Foreign investors have left the government and corporate bond markets of Italy and Spain in droves in the past year and there is little evidence of the selling slowing down. If anything, the worry would be that the process carries on for some time as it has done in Greece, Ireland and Portugal."
However, it would seem wrong to conclude that there is not enough panic in the equity market and too much in the bond market. The support for the equity market is real, just as the dangers for the bond market are real. The current balance is probably about right.
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