World Economic Update
According to Barclays, Global Macro Daily by Larry Kantor and Piero Ghezzi, global markets are moving without a clear direction and market sentiments are subdued given the uncertainty prevalent in the market because of mixed data. Despite positive news from the EU summit and central bank measures over the past week, people are still not confident about the markets and are being risk averse for the time being.
The report indicated that the two Asian giants, China and India are still struggling with their domestic problems and are unable to provide the growth that the world expects and needs from it. China is awaiting June cyclical activity data on Friday, and could have a strong influence on market sentiments.
The macro economic situation in India suggests a continuation of muddling through in FY12-13. The high fiscal deficit, high inflation and uncertain politics will likely negatively impact growth.
There has been a mini-rally in equities after May’s average performance; however, concerns over unsolved European problems and US policy risks still loom large over world economic activity and investor sentiments.
What to Expect?
“It’s not hard to construct an argument for fading the rebound. The recent deterioration in the outlook for global growth is likely to continue to weigh upon growth-sensitive assets, in particular equities and commodities. Given this, continued market recovery toward April levels, when the outlook for US and global growth appeared more secure, does not seem the most plausible base case. The second Greek election was more market friendly than the first, but it remains to be seen whether the new government will be able to deliver what is required. More generally, the European crisis is far from over, and even as broader risk markets have rebounded, Spanish and Italian debt markets are signaling intensified anxiety about these systemically far more significant cases. As the second half of the year approaches, questions about US electoral politics and fiscal policy hold increasing potential to rattle investor sentiment.”
There is however a strong possibility of an improvement in global sentiment. Based on Barclay’s report, Sovereign bonds are at extremely low yields and thus it would not be a good idea to stick with them for a long period of time. Although, the outlook for global growth has darkened, it is expected that the worst has passed us. China is expected to show signs that its growth has bottomed and would likely to recover in the second half of the year. Concerns over the US falling into recession still exist and if the US manages to maintain even a slow recovery, it is likely to bolster world sentiment. Though it seems almost impossible that there will be a solution in the Eurozone in the next few months, the good news emerging from the summit shows that policy makers are concerned and are ready to take decisive steps to improve the situation.
“While risk assets have recovered, in part, and measures of volatility have normalized, “safe haven” assets have become even more expensive. We continue to recommend that investors who are not extremely intolerant of mark-to-market volatility maintain a neutral allocation toward risk, recognizing that over most relevant definitions of the medium term, elevated market risk is accompanied by historically high risk premia.”
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