European uncertainty looms large

Weekly investment round up with John Dance, chief investment officer and CEO of Vertem Asset Management.

After quiet trading early in the week, global equity markets headed into stormy waters on Wednesday after the US Federal Open Market Committee (FOMC) published minutes from its January 29-30 meeting, revealing that a number of members made the committee aware that it “should be prepared to vary the pace of asset purchases” as the economic picture becomes clearer.

Investors were clearly spooked by the mere discussion of potentially tighter monetary policy at a time when the fiscal backdrop in the US looks increasingly uncertain.

The Vix (a measure of the price of protection against falls in the S&P 500 index) jumped almost 20% in the US on Wednesday and rose further yesterday to the highest levels since the turn of the year.

All three major US equity indices declined on Wednesday, leading to big sell-offs in Asian markets with the Chinese Shanghai and Shenzhen based indices taking the brunt of the punishment, all down over 2%.

This led into pessimistic European trading on Thursday with a busy day in terms of macroeconomic news. First up the Markit Flash French Manufacturing PMI (Purchasing Managers Index) figures displayed the index up at 43.6 vs 42.9 in January, but critically still below the 50 no growth mark on a ‘Flash’ basis (using roughly 85% of the full survey data).

This was followed by Germany pulling away from its weaker neighbour with Flash Manufacturing PMI edging up to 50.1 vs 49.8 for January and the collective Eurozone Flash Manufacturing PMI moving one notch lower to 47.8.

The fundamental data in Europe continues to look unfavourable as we enter another period of political uncertainty, with Italian elections this weekend looking increasingly tight. The infamous Silvio Berlusconi appears to have dragged his ratings up from 15-20 points behind the Democratic Party in national polls to just 5 points shy yesterday.

After the FTSE 100 broke another intraday technical barrier at 5400 points on Wednesday, it also fell victim to the poor sentiment around the globe on Thursday. Bank stocks took heavy losses with Barclays and Lloyds both down, 4.2% and 3% respectively; following good performances recently, basic resources companies also took a hit with Vedanta Resources down 4.1%.

BAE Systems was one of the few gaining stocks on Thursday (up 4.1%) as it released unaudited full year 2012 preliminary results beating earnings forecasts on an underlying basis despite revenues falling 7%, investors were also encouraged by a strong order book for 2013 and planned share buy-backs.

At the close yesterday European indices were down; the FTSE 100 -1.6%, the Dax 30 -1.9%,  the CAC 40 -2.3% and the FTSE MIB -3.1%. US equity indices were trading lower at the time of writing with the S&P 500 -0.5% and NASDAQ down 0.8%.

For investment advice, call , email or visit www.vertemassetmanagement.co.uk