Markets & views

Economic review 8 February 2010

Overview

World share prices sank for a fourth straight week, with rising anxiety over the parlous state of government finances sending stocks to their lowest level in four months. The MSCI World tumbled 2.2 per cent over the week as fears of government debt defaults in Greece, Portugal and Spain prompted a fresh bout of risk aversion. After initially falling, major government bond markets rebounded to end the week in positive territory.

Despite widespread concern over budget deficits, risk aversion lured many investors into the comparative safety of government debt. In the currency markets, the yen and the US dollar advanced strongly against the euro, while sterling was hurt by concern over the size of the UK’s deficit. Commodity prices fell with the Reuters/Jefferies CRB commodities index losing 2.7 per cent.

Equities

Music giant EMI reported a £1.8 billion loss for 2009 amid other news that the company was in danger of breaching debt covenants with Citigroup. Adding to its woes, EMI’s accountants said that, with a possible breach of lending terms and a £200 million pension fund deficit hanging over the firm, its viability as a going concern was now significantly in doubt.

In other earnings news, Cisco Systems, the largest maker of networking equipment, predicted accelerating sales growth and announced plans to increase its workforce by 3,000 as spending for growth resumes. The company said third-quarter revenue will jump 23 per cent to 26 per cent from a year ago. In more positive tech news, software company Autonomy reported fourth-quarter and full-year earnings that were in line with analysts’ expectations. However, of more interest to the market was a statement of confidence about the outlook for 2010. Panasonic also raised its sales forecast for the year and saw third-quarter profits surge as overseas and domestic sales increased during the quarter.

Ratings agency Standard & Poor’s cut its long-term credit rating on Berkshire Hathaway to AA+ from AAA on news of the company’s planned purchase of Burlington Northern Santa Fe for approximately $26 billion. Meanwhile, Shell and Brazil’s Cosan – the world’s largest ethanol-from-sugar cane producer – agreed to establish a 50:50 biofuels joint venture valued at $12 billion.

Bonds

Country risk remained the key driver of the bond markets and, indeed, the wider financial markets as contagion set in and the concerns that started in Greece weighed heavily on other eurozone economies, with Portugal and Spain the worst hit. The Greek budget proposal was accepted by the European Commission, but investors remained sceptical about the prospects of this budget reining in the government’s deficit, particularly with estimated debt issuance needs of €30 billion by the end of May and two-year bond yields now above 6 per cent (compared to German two-year yields of just 1 per cent).

On the positive side, the European Central Bank appeared to be more supportive of Greece in its latest statement, and external support seems to be the only viable resolution to the country’s present problems. Core government bond markets benefited from the flight to quality, with 10-year German bund yields falling 8 basis points. UK government bond yields were relatively unchanged. The Bank of England announced that no further additions would be made to the quantitative easing programme at this time, but did not rule out future additions. Corporate bonds remained resilient and are the best-performing asset class for the year so far.

Source of Data: Bloomberg and Financial Times. Any future returns and opinions expressed are based on the views of Aviva Investors Global Services Limited (Aviva Investors). The views are not intended to indicate any guarantee of return from an investment managed by Aviva Investors. The content of this document should not be construed as a recommendation to purchase or sell stocks. Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association. Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ 10/0145/100810