Quarter Ended 30 June 2009

Global equity markets in quarter two benefited from the perception of investors that ‘green shoots of recovery’ were being witnessed.  The OECD and IMF became more optimistic and revised upwards its forecast for global growth.  This ensured that investors moved into more risk orientated assets as economic indicators slowed at a contracting pace.  Whilst investors believed the worst with regard to banks balance sheets and the write-downs of toxic assets has occurred, economic fundamentals remain negative.  There has been a slowing in the contraction of economic indicators but it is argued that this has only been afforded as a result of significant fiscal and monetary stimuli.  It would be Appian’s suggestion that neither source of stimuli is sustainable over the medium to long term.

US Economy

The official US unemployment rate rose to 9.5%, however, some commentators have suggested that the real unemployment rate in the States could be in the high teens.  California is suffering a significant budget crisis to the extent that public sector workers have been asked to take 3 days unpaid leave every month.  The US consumer continues to increase their savings rates and repair their personal balance sheets.

Bond yields were very volatile over the quarter and this reflected differing investors concerns.  Some investors believe based on the significant monetary and fiscal stimuli that inflation would soon become an issue.  Other commentators were of the opinion that there remained significant excess capacity within the global economy and that this output gap would ensure that inflation would not be a significant issue in the near term. 

The US treasury allowed 10 US banks to make early repayment of TARP funds of US$68bn and whilst there has been less talk with regard quantitative easing for monetary authorities, there is a reluctance to talk about exit strategies or the tightening of monetary stimuli.  The Federal Reserve has the unenviable task of balancing a return of growth against an outbreak of inflation.

The USD continued to remain volatile over the quarter.  Fundamental economics would suggest based on the deficits presently being run by the Obama administration that the US Dollar over the long term will weaken.  The perception of the USD as the reserve currency may delay and limit its depreciation.

Eurozone Economy

The ECB provided significant amounts of liquidity to Eurozone banks.  The ECB lent €442bn to over a 1,000 Eurozone banks at one year rates of 1%.  The significant demand for these Funds reflects the feeling amongst the borrowers that rates are unlikely to be as low again and the continued need to strengthen balance sheets.  The ECB, however, suggested that the money lent to financial institutions should be reissued in the form of credit to consumers and corporates.  A positive note for capital markets was the ability of corporations to tap the markets to strengthen balance sheets.  This involved a combination of rights issues, share placings and issuance of corporate bonds.  However it also confirmed that banks whilst protesting that they are offering credit, the cost of this credit is prohibitively expensive relative to other forms of funding.  On a positive note there has been a significant stabilisation of the money markets with a significant narrowing of the difference between money market rates and the base rates of global monetary institutions.  Three month euribor at the end of the quarter was trading at 10 basis points above the ECB rate, lower than the 15 basis points spread prior to the credit crisis.

Emerging Markets

Commodities rose in expectation that the global economic recovery led by the emerging markets was well underway.  Ultimately though for a recovery in the emerging markets one needs to see a recovery in US consumer confidence and spending.  Significant risks remain with regards developing economies as reflected in the considerable concern that Latvia was nearing default which would prove particularly problematic for Swedish banks who had lent significantly into this Baltic country.

Irish Economy

The S&P downgraded Ireland’s credit rate to AA outlook negative, from AA+ after removing Ireland’s AAA rating in March.  This is purely a reflection of the government’s balance sheet and the required costs of the setting up of NAMA.   Whilst a complicated process, the significant delays in the setting up of NAMA is restricting any form of recovery in the domestic economy.

Summary