Alaric Capital market comments June 2012


Economic data in States is starting to get weak and bond market was a proxy of this weakness as yield curve is USA continues to flatten with US 10 Year T-notes reaching all time record low yield below 1.5% . Chicago PMI fell for a third month in a row which is considering for recession sign in months ahead, Q1 GDP was revised down to 1.9% from 2.2% first estimated.  Weak economic data pushed equity markets even lower and S&P500 broke below its 200 DMA heading even lower in weeks ahead with possible interim target 1180 this summer.  Federal Reserve for the moment is not reluctant to introduce officially new round of QE as most analysts expected and these comments pushed precious metals prices lower last several weeks. Still economic data does not favor new round of printing press but this may change is weeks and months ahead.

Weak commodities have negative influence of Brazil economy and economic data coming from Brazil starting to confirm that. Brazilian slowdown in economic growth is expected to generate further easing of monetary policy and more fiscal and credit expansion.

Any positive developments in Eurozone debt crisis may lift the market as Europe was may driver of recent downside correction for equity markets in States. Investors will watch not only short term positives as pumping liquidity in banks but also long term actions as steps for fiscal and monetary union is troubled Europe



China’s economy is slowing more than expected and investors are pricing in possible stimulus actions. HSBC’ PMI decline to 48.4 in May from 49.3 in April which reflect difficult times for export industry in China. At the moment Bank of China is still reluctant to respond with new stimulus but we think this just a matter of time. Other export oriented countries in the region also feel the heat of European debt crisis and the global slowdown. Indonesia posted surprising trade deficit of $640 mn in April due to severe price declines of commodities.  Australian Central bank lowered the benchmark rates as weaker commodities prices and slowdown down in China have direct impact of export oriented economy. We think that RBA will continue to lower rates in months ahead as China is heading for hard landing and consequences for Australian economy will be big.





ECB is refusing to take actions on European debt crisis recent weeks without changes of fiscal union in Eurozone.  German Yield curve flatten further and it is basically flat at zero rates up to 5 year maturity. The panic in Europe is so big that German 2 Year yield went negative for first time in the history. Spanish debt continues to be under pressure with spread of 10 Year Spanish bonds over German bund reach almost 550 bps. Market is watching 7% handle which is considering critical point after that Spain may repeat Greece scenario.  Rhetoric is rising about the deeper institutional reforms to save the Euro. As ECB president Draghi said that eurozone’ current structure is unsustainable and urged leaders to clarify their vision for the future of the area. EU Commissioner Rehn said that the euro area has a significant risk of breaking up, while Spanish Economy Minister de Guindos said that the “battle for the future of the euro” will play out in Spain and Italy in the next few weeks. Meanwhile, German Chancellor Merkel said that “there are integration steps which will require treaty changes. We are not at that stage today, but nevertheless there are no taboos in our discussions.”. Euro area manufacturing contracted for a 10th straight month in May, with the German decline the biggest in 3 years. Italian unemployment rose to 10.2% in April.



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