Standard & Poor’s has been heavily criticised for downgrading US debt, with Legg Masons’ outspoken CIO, Bill Miller, one of the most vociferous in his comments, saying things like: “At best, S&P showed a stunning ignorance and complete disregard for the potential consequences of its actions on a fragile global financial system.”
As an aside, Miller’s Legg Mason Capital Management Value fund was itself downgraded earlier this month due to continued underperformance.
Positive reaction
But the reaction to Europe’s latest move is seen as confidence-building and a positive signal that Europe is dealing with its problems. Trichet has also shown he is not afraid to backtrack as having said he would not step in to support Spain and Italy that is precisely what he has done with both countries’ bonds rallying strongly.
At the weekend, German Chancellor Angela Merkel and French President Nikolas Sarkozy issued a joint statement that resoundingly endorsed the EBC’s actions and stood behind its ability to intervene in the secondary markets.
As Jim Cielinski, head of fixed income at Threadneedle, said: “The ECB action is a first important step. By itself it doesn’t increase growth dramatically but it can improve confidence and should engender a better outlook.
“By taking this step policymakers are hoping to calm nerves within the eurozone.”
Much of the noise around Europe at the moment is about improving investor sentiment. Cielinski has been underweight in his peripheral Europe holdings but is now looking for opportunities to moderate this position as “we believe this action reflects an important new direction for policymakers”.
Capital games
Politically, Trichet has played a good hand – something Obama has failed to do with regards to the US debt position – because he realises that, as Neptune’s head of European equities, Rob Burnett, described it, he needs the political capital in place before he can deploy the economic capital.
If economic sentiment has been equally poor for both the US and Europe for some time, Europe’s relative political strength seems to be nudging it slightly ahead of its US rival. This is certainly the case for the bond markets, and even in the volatile equity markets, Europe is trading in a narrower range than the US (and certainly the UK).
Only the reliable predictor of time will tell us whether the outlook will remain the same but Europe’s bailout practice is standing it in good stead, while the US has learned some valuable lessons. While I am not trying to say everything s now rosy, there are signs of positive headwinds for both US and European investors, especially as corporate balance sheets remain strong.
