Positive growth versus Greek uncertainty.

17th May 2012

Ian Copelin, Investment Director, my wealth, comments “The FTSE-100 failed to hold on to early gains this morning and ended lower for the fourth straight day, as fears about Europe continued to weigh on the market.

When the market closed, the FTSE-100 was down 66.87 points, or 1.24%, to settle at 5,338.38 – its lowest level since 29 November 2011.

The FTSE-100 along with other major European indexes initially rebounded this morning – sentiment was boosted after better-than-estimated US economic data showed housing starts rebounded in April and industrial production rose 1.1% (the fastest growth in over a year), coupled with comments from several members of the Federal Open Market Committee (FOMC) yesterday that further monetary easing was an option.  This follows better-than-expected economic data from Europe – on Tuesday (15 May 2012), data released showed that Germany had helped the euro area avoid recession.  The German economy expanded 0.5% (compared with a forecast of just 0.1%), while GDP in the 17-nation euro region was flat in Q1 compared with the last quarter of 2011 (the market was forecasting a 0.2% contraction).

However, concerns over Greece’s political and economic future again took the centre stage.  The ECB has announced that it will temporarily stop lending to some Greek banks to limit its risk, while the ECB President, Mario Draghi, acknowledged for the first time that Greece could leave the monetary union.  Up until now a Greek exit was seen as ludicrous by the ECB, but it is gradually becoming seen a probability and the ECB is clearly starting to prioritise its balance sheet over monetary-union geography.  Following the failure of Greek party leaders to form a coalition government new elections will be held on 17 June – opinion polls suggest that parties opposed to the conditions of its international bailouts are gaining, which raises the possibility of its exit.  Although the trend of bank deposit withdrawals in Greece has slowed, on Monday Greek banks suffered €700 million of withdrawals.

Come what may of the euro, equities look very attractive and I believe will endure:  US economic growth is positive (and beating expectations) and corporate earnings continue to grow strongly (and beat expectations – so far this quarter 95% of companies in the S&P 500 have reported earnings.  Of these 330 (70%) have beaten earnings expectations by an average of 6.22%).  If you ignore Europe, everything is moving slowly but surely in the right direction.  Unfortunately when you look at Europe, Greece is creating the uncertainty right now – and as I said in my last note, global equity markets can cope with bad news, but it hates uncertainty.”