Sunday, August 29, 2010

Summers over.

Nearly two months since I last posted. Not much has happened since. Markets have been treading water, torn between the optimists who see recovery round the corner and the pessimists who don't. The Dow and the FTSE seem to be stuck in tight trading corridors around the 10400 and 5200 levels respectively. With the jury out and the data releases contradictory, corporate bonds still seem to be as safe a place as any to overweight.

As we enter the second half the benefits of last years stimulus package will start to wear off. Inventory restocking has more than run its course and companies have done all the easy cost cutting. The growth outlook everywhere seems to be moderating. This puts policy makers in a difficult position. Do nothing and deflation may rear its ugly head. More quantitative easing and inflation becomes a near certainty. Through it all banks continue to rein in their lending book. The airline numbers are a pretty good proxy for what's happening in the real world. Premium traffic in June was up 40% over the same period a year earlier. Economy traffic was up 10%. However, compare the latest numbers with the levels of April 2008, the peak month prior to the crisis, then premium traffic is still down 13%.

Expect to see some sharp rallies and some sudden falls on low volumes as Q3 turns into Q4 and optimists and pessimists battle it out. However, unless growth picks up the financial system will find itself under growing pressure. Get set for greater, possibly extreme, turbulence. Ireland and its banks are a cause for concern and may have wider ramifications for the Eurozone and its banking sector.

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