Posted By: Matthias Paul Kuhlmey
To follow-up on our recent commentary, the market, in fact, was ready to “bounce.” The positive momentum over the past trading sessions was further improved by the Greek Government passing a crucial confidence vote to further support Prime Minister Papandreou. One may think this is the time to “go all in,” and deploy those Dollars sitting in Money Market Funds. Our clients, however, know that we have concluded differently and have even left accounts partially hedged. The following are important points of consideration:
Mr. Papandreou’s victory needs to be put into perspective. Greece, as a country and economy, has not moved out of the “danger zone.” In fact, the vote is only the first step to allow Mr. Papandreou to introduce austerity measures that, already today, are not supported by nearly 50% of the population. An increasingly larger group of fund managers suggest that the vote of confidence and legal passage of the austerity plan will only be temporary measures, and that most market participants are accepting the default of Greece. What matters, when this day arrives, is how the situation will be managed.
Related to the above, it is worth noting that, in April 2010, the World MSCI Index peaked around 880 and then traded back on fears over Greece and the end of QE1. In November 2010, the Index, once again, pulled back from that level, as Emerging Markets were not considered the force leading global markets and economic activity higher. In March 2011, following the disaster in Japan, the World MSCI fell to 876 before rebounding significantly; today, the Index is trading at the same level, but below its 200-day moving average. If the market cannot rally from here, then we are clearly facing a very different kind of investment environment (Source: GaveKal).
Another piece to the puzzle is China’s money-market rate, which has climbed to its highest level in more than three years, as a worsening cash crunch prompted the Central Bank to suspend a bill sale. The seven-day repo rate increased 0.47 percentage points to 8.81%, according to a weighted average rate compiled by the National Interbank Funding Center. The rate, during trading, touched 8.93%, the highest level since October 2007 (Source: Bloomberg); this, in addition to the fact that the Chinese Market (China Shenzhen A Share Index) is down more than -15% (local) for the year and continues to fall, should make investors pause.
All things considered, the current market recovery appears to be suspicious to us and may offer attractive levels to re-allocate to more risk-averse positioning.
