Equity Market Update at End July 2011

Published by Filipe R. Costa on Wed, 27/07/2011 - 17:56
obama and cow

The year of 2011 has been full of geopolitical events affecting equity markets. We assisted to an erthquake in Japan that at some point reminded us of the Chernobyl incident because of radiation leakages occurring at the Fukushima Daiichi complex. At that time, equities were violently pushed down. We had a full set of problems in the MENA area. People was unhappy with their totalitary leadership and tried to put down their regimes. The conflict in Lybia, in special, had a major impact in equities and oil prices.

After the dust settle down, we assisted to a period of ratings downgrades on European sovereign debt that put Greece almost on default and led Portugal to ask for a bailout.

Lately, economic data in the US has not been good and it seems the recovery is stopping. Adding to this, there is a huge probability of ocurring a default in the US since Democrats and Republicans can't settle an agreement to raise debt ceilings.

We had enough so far for the seven months that are almost gone in the year. What is the result of all this mess? Which countries are in good shape and which are not so well? The following table summarises data for several equity indices across the globe regarding 2011.

Name Close YTD Chg % YTD High Fall % From High YTD Low Inc. % From Low
Russian Trading System Index 1987.83 12.15 2123.56 -6.39 1764.39 12.66
Nasdaq 100 Index 2429.45 9.54 2429.5 0 2192.96 10.78
Dow Jones Industrial Average 12501.3 7.98 12810.54 -2.41 11613.3 7.65
Nasdaq Comp. 2839.96 7.05 2873.54 -1.17 2616.48 8.54
DAX (Xetra) 7349.45 6.3 7527.64 -2.37 6513.84 12.83
S&P 500 1331.94 5.91 1363.61 -2.32 1256.88 5.97
FTSE All-Share 3085.14 0.73 3160.85 -2.4 2909.52 6.04
FTSE 100 5929.73 0.5 6091.33 -2.65 5598.23 5.92
IBEX 35 9833.5 -0.26 11113 -11.51 9348 5.19
CAC 40 3787.88 -0.44 4157.14 -8.88 3650.71 3.76
Euronext 100 684.97 -0.84 740.54 -7.5 657.59 4.16
Nikkei 225 10097.75 -1.28 10857.5 -7 8605.25 17.34
Hang Seng 22572 -2.01 24419.5 -7.57 21599.5 4.5
BEL 20 Close 2496.66 -3.18 2770.81 -9.89 2384.12 4.72
S&P/ASX 200 4573.3 -3.62 4971.2 -8 4451.7 2.73
AEX Index 336.74 -5.03 374.19 -10.01 323.17 4.2
FTSE MIB 19030 -5.67 23178.5 -17.9 17885.75 6.4
Swiss Market Index 5990.18 -6.93 6717.25 -10.82 5826.26 2.81
PSI 20 7027.95 -7.38 8126.06 -13.51 6560.71 7.12
S&P CNX Nifty 5574.85 -9.12 6157.6 -9.46 5225.8 6.68
BSE Sensex 18518.2 -9.71 20561.05 -9.94 17463.04 6.04
OMX Nordic 40 988.35 -10.56 1138.84 -13.21 962.69 2.67
Bovespa Stock Index 59971 -13.47 71633 -16.28 58838 1.93

After carefully looking at the table above there are some points that are wirth pointing.

The first point that I want to mention is that Europe is currently an heterogeneous area with Germany and the rest. While Germany is growing fast and recovering from the financial crisis such that the DAX is up 6.3%, all other markets are flat to down. The FTSE is almost flat reflecting the tepid growth that was last reported at 0.2% for the 2Q this year. The Bank of England is keeping its key interest rate at 0.50% while inflation is rising to avoid further depressing the economy. The CAC 40 is a little down also reflecting an economy that is much behind Germany at this point. The IBEX is a surprise by being mostly flat, after all negative comments made on Spain about ratings downgrades. The Belgian BEL 20, the Nordic OMX Nordic 40, the Dutch AEX, The Italian FTSE MIB, the Portuguese PSI 20 are all down.

The second point to make now is relative to US equities. The three main indices, Nasdaq 100, S&P 500 and Dow 30 are all up for the year, rising an healthy 7 to 9%. After all problems around the globe, US companies seem to continue to surprise positively by presenting good earnings and prospects. Nevertheless, with all problems that scare Europe and threat banks in the whole world, and with the soft economic data recently presented, the situation can change for the rest of the year.

The third point is on technology stocks. The technology index Nasdaq is leading the US indices with an increase of 9.54% and near year highs.

My fourth note is on BRIC countries: Brazil, Russia, India, and China. It is interesting that these promising economies are growing at very different rates as reflected in the stock market. Russia is leading our table with a rise of 12.15%. Brazil and India are at the bottom, having experienced heavy losses so far this year. Russia is one of the largest oil producers that have been benefitting from the rising oil prices we are assisting this year. The country is not an OPEC member and can manage its production as it better intends to. This gave a major advantage to the country that seems disconnected from all geopolitical tensions too. India and Brazil are lagging behind Russia. The Chinese stock market has not being doing well in 2011 too. It is not in the above table but the main index has lost 3%.

We are now going into August, a period of low volume in the stock market since most traders take the time for a vacation. After that, let's see what will happen for the rest of the year. Is Russia going to continue its over performing trend? Will Europe continue to move at two speeds? And, can the US hold the gains despite the soft economic data? 

Those are fair questions that are not easy to answer. Many international events can affect equities. European governments need to give a strong answer regarding bailout funds for the future such that markets have a clear view that the Euro is here to stay. Angela Merkel will have to avoid having two speeches: one for its citizens and another to Europe. European leaders will have to look to the future instead of protecting their current government seats. If this does not happen, the Euro will have difficult times, credit ratings agencies will keep their downgrading trend over European countries, and as time passes it will be very difficult to keep a crisis contained.

In the US we need to look at the extension of the recent cooling. If the job market continues like it has been, equities may retreat for the rest of the year. If oil prices decrease, some positive effects can spread all over the world such that the weight on inflation can ease a little and give some more margin for expansionist policy.

Spread betting traders should be very careful with what is happening because of the risk a margined product has. Although spread betting is an excellent way of profiting from all the volatility we have experienced in the year, there are some risks that can be avoided by setting sound risk management rules like stop losses. 

If you want to know more about spread betting please read through our  spread betting explained section.