10 July 2009

The magnificent 7 and equity markets - Review 2

After the low of March 9 and the recent high of June 11, we have entered a phase of market consolidation. Let's review what the magnificent 7 are telling us (I recommend the reader to go to the GTI web site for their monthly newsletter, one of the best available).

S&P 500 Banks index: after recovering from the early March lows and reaching a peak early May, the sector is consolidating. There are still uncertainties regarding the public/private plan to buy toxic assets from banks. Let's see whether the 100 mark will hold. Whilst consolidating, still positive.

Global 1200 financial index
: Like in the US, the world financial sector is posing and closing on its 200 days moving average. Still positive.

TED spread (LIBOR USD 3 mth - US 3 mth T-bills
): The spread continues to contract and is now well below the pre-panic level. Positive.

USD bank BBB 10 yr - US 10 yr yield
: Still much too high and not fully convincing; no break of the 7% level as yet. Slightly positive.

OEX volatility
: OEX volatility has recently increased reflecting new doubts about the pace of the recovery and uncertainties about a possible second stimulus package in the US. The rise is however not substantial. Still positive.

S&P Case Shiller house price index
(source: S&P): The latest data published in June (151.27 for the Composite 10 and 140.10 for the composite 20) still going down whilst at a slower pace (Composite 20 down 18.1% yoy vs 18.7% for March 19% in January). Existing home price went up in May (172.9vs. 166 in April) and housing supply is also edging down in May (9.6 months vs 10.1 months in April). A few signs are pointing towards an improvement but not bottomed yet hence still negative.

Oil price: Oil prices reached $70/b in June before retreating sharply over the past few days. It will not last but positive.

Conclusion: In our last review (May 18), we advise to take profits off the table. Fundamentals in the interbanking market have much improved but many uncertainties still remain in the Western world banking sector. Several economic indicators point towards an improvement but nothing to get really excited about it. Many clouds are still around, even if hurricanes have disappeared despite the favourable period in the Gulf of Mexico and the East coast. Relax, enjoy the summer, take time for the next action: no need to be in a hurry.