LONDON: Investors are bracing themselves for a potentially stormy market in the second half of this year as they assess the extent of a slowdown in the global economy and fallout from a possible Greek sovereign debt default, Reuters reports on Friday, June 24.
World stocks, measured by MSCI , are courting 2011 lows as downgrades to the growth outlook from the Federal Reserve and the lingering euro zone debt crisis have prompted investors to cut back on risky assets.
The key event risk seen over the next few weeks relates to Greece, which has been promised more money to help stave off a looming default provided its parliament enacts an austerity plan agreed with international lenders.
A vote on the package, which aims to plug a 3.8 billion euro funding gap, is due on Tuesday, but its passage is not seen as certain given vehement popular opposition to the measures.
Euro zone finance ministers will decide on July 3 on the second bailout package, which is crucial to prevent Greece from defaulting on debt that matures in mid-July.
Against these uncertainties, investors are also weighing up opportunities towards the latter half of this year given attractive valuations. For now, staying put seems to be the favourite course for asset managers.
Market moves this year also show there is no panic among asset managers. The MSCI index may be near lows, but it is broadly flat since January, after losing nearly 8 percent since hitting a three-year high in May.
"We recommend hedging portfolios ... The Greek financial crisis puts equity markets at risk. If a default becomes the solution, the risk of contagion to countries such as Spain and Italy could lead to a vast equity markets consolidation," said Christophe Donay, head of strategy at Pictet Wealth Management.
"Also, in case of a more pronounced slowdown than the anticipated soft patch in the global economy, earnings estimates are at risk."
Barclays Capital also advised investors to maintain their neutral stance given a moderately benign investment climate mildly supportive of risky assets.
When asked which asset class is likely to perform the best over the next three months, 20 percent of investors surveyed by the bank in June chose equities, against other assets that received 15-18 percent.
In comparison, investors were distinctly more bullish in the December and March surveys, with more than 60 percent of respondents favoring commodities and equities.
According to the U.S. AAII investor survey cited by Barclays, the proportion of investors reporting a bullish outlook over the next six months had declined steadily, to as low as 24 percent in recent weeks from 43 percent in the first week of April.
"Asset allocation opportunities are likely to be limited in magnitude and more tactical in nature. In the near term, for example, we believe that the present soft patch should be succeeded by a recovery in activity over the summer, which may provide a tactical opportunity to fade market anxieties in the weeks to come," Barclays said in a note to clients.
The coming week's data might brighten sentiment for the medium-term outlook for the global economy.
In Japan, the central bank's closely-watched tankan survey is expected to show big manufacturers plan to ramp up capital spending to invest after supply chain disruptions after the March 11 earthquake.
''
FUNDING MARKET STRESS
A Greek default would force European banks and governments to take big losses, undermine the creditworthiness of other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, back into recession.
Greek jitters are sweeping into the funding market, where the cost of one-month euros in the London interbank market hit its highest since March 2009 earlier this week, reflecting demand for liquidity in the single currency.
The one-year euro/dollar cross-currency basis swap , which shows the rate charged when swapping euro interest payments on an underlying asset into dollars, stood at -33.25 on Friday, having fallen all the way from -14.25 earlier in the month.
It posted on June 16 its sharpest one-day fall since early May 2010, before Greece's first bailout deal was reached.
Moreover, European banks are particularly reliant on U.S. money markets for their funding and any contagion or further ratings downgrades could put their funding at risk.
JP Morgan estimates that $600 billion of European commercial paper and certificates of deposits -- about 3.5 percent of total liabilities -- is held by U.S. prime money market funds, one third of which is issued by French banks.
Fitch Ratings estimates that U.S. money market funds' exposure to European banks stand at roughly 50 percent of total assets.
"Money market funds are a potential channel for euro zone credit market volatility. For European banks, a loss or reduction in MMF funding could create negative perceptions about an institution's financial strength," Fitch said in a report. - Reuters
World stocks, measured by MSCI , are courting 2011 lows as downgrades to the growth outlook from the Federal Reserve and the lingering euro zone debt crisis have prompted investors to cut back on risky assets.
The key event risk seen over the next few weeks relates to Greece, which has been promised more money to help stave off a looming default provided its parliament enacts an austerity plan agreed with international lenders.
A vote on the package, which aims to plug a 3.8 billion euro funding gap, is due on Tuesday, but its passage is not seen as certain given vehement popular opposition to the measures.
Euro zone finance ministers will decide on July 3 on the second bailout package, which is crucial to prevent Greece from defaulting on debt that matures in mid-July.
Against these uncertainties, investors are also weighing up opportunities towards the latter half of this year given attractive valuations. For now, staying put seems to be the favourite course for asset managers.
Market moves this year also show there is no panic among asset managers. The MSCI index may be near lows, but it is broadly flat since January, after losing nearly 8 percent since hitting a three-year high in May.
"We recommend hedging portfolios ... The Greek financial crisis puts equity markets at risk. If a default becomes the solution, the risk of contagion to countries such as Spain and Italy could lead to a vast equity markets consolidation," said Christophe Donay, head of strategy at Pictet Wealth Management.
"Also, in case of a more pronounced slowdown than the anticipated soft patch in the global economy, earnings estimates are at risk."
Barclays Capital also advised investors to maintain their neutral stance given a moderately benign investment climate mildly supportive of risky assets.
When asked which asset class is likely to perform the best over the next three months, 20 percent of investors surveyed by the bank in June chose equities, against other assets that received 15-18 percent.
In comparison, investors were distinctly more bullish in the December and March surveys, with more than 60 percent of respondents favoring commodities and equities.
According to the U.S. AAII investor survey cited by Barclays, the proportion of investors reporting a bullish outlook over the next six months had declined steadily, to as low as 24 percent in recent weeks from 43 percent in the first week of April.
"Asset allocation opportunities are likely to be limited in magnitude and more tactical in nature. In the near term, for example, we believe that the present soft patch should be succeeded by a recovery in activity over the summer, which may provide a tactical opportunity to fade market anxieties in the weeks to come," Barclays said in a note to clients.
The coming week's data might brighten sentiment for the medium-term outlook for the global economy.
In Japan, the central bank's closely-watched tankan survey is expected to show big manufacturers plan to ramp up capital spending to invest after supply chain disruptions after the March 11 earthquake.
''
FUNDING MARKET STRESS
A Greek default would force European banks and governments to take big losses, undermine the creditworthiness of other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, back into recession.
Greek jitters are sweeping into the funding market, where the cost of one-month euros in the London interbank market hit its highest since March 2009 earlier this week, reflecting demand for liquidity in the single currency.
The one-year euro/dollar cross-currency basis swap , which shows the rate charged when swapping euro interest payments on an underlying asset into dollars, stood at -33.25 on Friday, having fallen all the way from -14.25 earlier in the month.
It posted on June 16 its sharpest one-day fall since early May 2010, before Greece's first bailout deal was reached.
Moreover, European banks are particularly reliant on U.S. money markets for their funding and any contagion or further ratings downgrades could put their funding at risk.
JP Morgan estimates that $600 billion of European commercial paper and certificates of deposits -- about 3.5 percent of total liabilities -- is held by U.S. prime money market funds, one third of which is issued by French banks.
Fitch Ratings estimates that U.S. money market funds' exposure to European banks stand at roughly 50 percent of total assets.
"Money market funds are a potential channel for euro zone credit market volatility. For European banks, a loss or reduction in MMF funding could create negative perceptions about an institution's financial strength," Fitch said in a report. - Reuters
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