THERE are renewed fears of fiscal backsliding in both Italy and Greece. Reassurance is pending in Italy, but in Greece the "troika" has yet to be satisfied (even if it is, as we write, still unclear whether the private sector involvement needed will be forthcoming).
More positively, Germany’s Constitutional Court confirmed that the bail-out(s) are not unconstitutional. Elsewhere, the Dutch PM and finance minister argue that greater fiscal integration (with expulsion as a possible sanction if countries fail to behave in future) is the way forward for the euro, showing that senior politicians do indeed “get it”.
Many of them always have – but have not been moving as quickly as the markets would like simply because they are unwilling, unable, or too uncoordinated. Meanwhile, the ECB has turned from monetary hawk to dove.
We still think the euro – and European banks – will “muddle through” this crisis intact. The ECB – and eventually the EFSF and ESM – should be able to act as a backstop while that more unified fiscal infrastructure is slowly being built, and the growth outlook is not grim enough to unsettle this view. But markets may not agree with us any time soon.
The Swiss Central Bank sprung a policy surprise – and a big trap for euro bears – with a floor for the euro/franc rate.
For this to succeed long term requires that markets are convinced by the SNB’s false modesty – it is pretending to be willing to jeopardise its credibility.
But for now there is one fewer “safe haven” – making some of those that are left potentially more volatile, perhaps. Our favoured safe haven, remember, is cash – but in balanced portfolios we also favour stocks, with underweights focused on bonds.
In the US the focus is more directly on the economy, and on what the Fed and President Obama can do to get it moving more briskly. The Fed has not got much room to act, but it has again pledged to use it if needed.
And the president’s attempted fiscal stimulus, equivalent to 3% of US GDP, was both larger and better crafted politically than expected.
This focus on policymakers on both sides of the Atlantic testifies to investor nerves, rather than to any new-found faith in their ability to fine-tune the business cycle. But it is not edifying, all the same.
We would rather invest in businesses because we think the companies involved are well-run, profitable and attractively valued than because the Fed may be about to act as the bigger fool in the bond market.
Such data as has been released has actually been a bit less fragile than feared. The US services ISM and trade data are consistent with solid growth in Q3, and consumer credit seems to be reviving. In China, lower inflation in August, and continuing double-digit growth in industrial output and retail sales, suggests a “soft landing” there is still likely.
Admittedly, these are second-line indicators. The next major release is the US retail sales data for August.
The US consumer is still the most important single customer base for Global Inc, and if their spending starts to follow their reported mood south then a more meaningful economic setback will be at hand. Retail sales are two-fifths of that spending. We expect August sales to have been little changed.
:: Andrew Miller, Barclays Wealth, director
