Greece, Greece and more Greece.

4th October 2011

Ian Copelin, Investment Director, my wealth, comments  “Yesterday (3 October 2011),  economic data released on manufacturing industries and construction spending topped market estimates – providing more evidence that the US (the world’s largest economy) and the UK economy are not going into a recession, but is simply growing slowly.

In the UK, a manufacturing index unexpectedly increased in September from a 26-month low.  The gauge, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, rose to 51.1, the highest reading in three months, from a revised 49.4 in August.  The measure was expected to fall to around 48.5 from an initially reported 49 in August.  A level above 50 indicates expansion.

In the US, the Institute for Supply Management’s (ISM) factory index rose to 51.6 in September from 50.6 in August – a reading higher than 50 indicates that respondents are seeing better conditions, while an index reading above 42 is normally considered the benchmark for economic growth (below 42 implies a recession could be just around the corner).  Construction spending in the US also unexpectedly rebounded in August, climbing 1.4%.

Unfortunately, equity markets erased early gains on the back of this better than expected data and again focused on the Greek debt crisis, as European finance ministers meet to decide on whether Greece should get its next tranche of fiscal aid.

Ministers have started to drop hints that bondholders may have to take bigger losses on Greek debt in a second aid package, as Greece’s economic outlook has deteriorated.

Consequently, financial stocks were among the worst performers.  Dexia, Belgium’s biggest bank by assets, said looking at steps to fix the company’s ‘structural problems’ and that it was discussing a possible breakup of the company after the debt crisis reduced its ability to obtain funding.  Last week, the cost of insuring Dexia bonds hit an all-time high of 900 basis points, nearly double the level just two months ago – Dexia has been among the hardest hit by the closure of the interbank lending markets and the continuing unwillingness of investors to buy the bonds of eurozone banks.”