A strong example of this was the release of strong US consumer sentiment numbers reported last week. Despite beating market expectations and hitting a three month high of 72.4 in May, up from 69.8 in April, markets responded with a sell-off.
UK equities have also struggled to find any positive news to cling on to for any length of time. The FTSE 100 has been flirting constantly with the 6,000 barrier, breaching it more than 25 times already this year without making any real progress.
So what’s causing the markets’ apprehension? We don’t think that markets are worrying too much about Greece, or the Middle East anymore. Both stories, while refusing to go away, don’t appear to have the capacity to provide us with any potential shocks. It’s therefore more likely to be concern over China, and whether its attempts to apply the brakes to its overheating economy will lead to either a hard or soft landing.
China’s Consumer Price Index (CPI) figure rose 5.3% in April, down from its high of 5.4% in March, but still high enough to present a very real problem. That said, the pace of monetary tightening in the developing world, where inflation is a big concern, is continuing to take investors by surprise.
China is still showing signs of strong momentum at the ground level, but its economic policy remains something of a mystery. We think it is too early in the cycle for China to have a hard landing, and that its policy measures have been gradual enough to avoid a sharp slowdown, but sentiment seems to be the main hurdle that investors cannot see past at present.
The end to QE2
Another issue leaving investors feeling unenthusiastic is the imminent removal of the US Federal Reserve’s second round of quantitative easing (QE2). We think that the ending of QE2 may not be as seismic for markets as many are expecting. Fears that the largest buyer of US treasuries will have ‘left the room’ may be overdone.
Treasury bills remain the global safe haven investment of choice, and given the uncertain outlook, there’s really few other safe havens for investors to turn to. Furthermore, China continues to buy up T-bills in large quantities, even if has been looking to diversify into the Euro and the Yen in recent times.
Given the current environment, and the tonal shift that has taken place, it seems wise for us to take some risk off the table, and allow our cash positions to build up. We have also been selectively adding US treasuries, as an alternative to cash. They could prove a useful safe haven – especially if China does turn over – and also if the dollar appreciates following the end of QE2.
Equities remain our preferred asset, and there’s still the possibility that equities could gather upward momentum in the last two quarters of the year, but given the absence of any meaningful forecasting for 2012, this may become a good pricing point at which to take profits.
