A February 23rd Goldman daily highlights how huge risks abound right now, across most of the world. Primarily, major market concerns include:
- Emerging market policy tightening (China)
- Regulatory and political uncertainty (U.S.)
- Sovereign credit-worthiness (Europe)
Goldman: About three months ago, on the 2nd of December, we released our global economic forecasts for the year ahead along with our Top Trades for 2010. Summarizing the outlook, Jim O’Neil called it “Exciting with Risks”, and so it has proved even in the first few months. Indeed, less than a quarter into the new year, the optimism of the early January market rally feels like a long time ago. Rather there appear to be risks everywhere one looks, some real and others ‘bushes’ that may be supposed ‘bears’.
Yet the funny thing is that markets have actually held up remarkably well relative to the shocks of uncertainty we’ve been delivered over the last few weeks.
Goldman [Emphasis added]: In the midst of this maelstrom of risks and headline scares, what is striking is the degree to which global markets have rolled with the punches thrown at them. In the midst of this maelstrom of risks and headline scares, what is striking is the degree to which global markets have rolled with the punches thrown at them. Compared from the 2nd of December 2009, the S&P 500 was unchanged as of yesterday’s close at 1109. After reaching the giddy heights of 1150 in early January, markets fell back sharply to 1060 as all these worries emerged one on top of another, before recovering some poise in the last few days.
Spot equity volatility, as measured by the VIX is in fact slightly lower after its round-trip, 20 compared to 21 in early-December, and longer-dated volatility has compressed even more significantly despite these scares. Cyclical assets such as Wavefront Growth and AUD TWI are almost exactly unchanged as well, and commodities such as copper and crude are a few per cent higher.
Government Bonds too have range traded over this period, in line with the views of Francesco Garzarelli and team. And corporate credit indices are either flat to early-December levels or slightly tighter after their round-trip. The iTraxx Main credit index in Europe is unchanged at a level of around 84bps, whereas the CDX IG index in the US is tighter by about 10bps at a level of 91bps currently. High yield indices in both regions are also somewhat tighter compared to early December levels.
This is something that has struck us for equities particularly. Risks abound, but valuations matter as well, and many developed market equities are still cheaper than they were a few years back, and markets at lower valuations can withstand bad news far better than those at higher ones. So the global economy is full fo risks, but at the same time most major companies will survive and in 10 years will likely be larger enterprises. Thus risks are perhaps well priced-in given the relative market shrugs in response to negative headlines lately.
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(Via Goldman Sachs, “Global Markets Daily”, 23 February 2010)