September 10, 2010

Market Wrap: for the week ending 10-Sep-2010

• Spot Gold edged down to $1242 on Friday, the first weekly decline in more than a month (Reuters)
• Vanguard offers new S&P 500 ETF (ticker: VOO) with an expense ratio of only 0.06% (Vanguard)
• Euro reached a record low against the Swiss Franc on concerns about Europe’s economy (AP)
• German exports fell in July by 1.5% compared with the previous month (Eurostat)
• Yield spreads on Greek and Irish bonds reached record highs over German Bunds (Economist)
• Yield on Portuguese ten-year government bonds reached the highest level in four months (Economist)
• US trade deficit in July 2010 decreased 14.0 %, to $42.8 billion (ESA)
• Bank of England held interest rates at a record low of 0.5% for the 18th consecutive month (AP)
• US slipped two places to become fourth in an annual ranking of business competitiveness (WEF)
• Bank of Canada raised its key interest rates by 25 basis points to 1.00% (WSJ)

Weekly Market Barometers    
Stock-2010-0910   FX-2010-0909

Chart Of The Week
The inter-connectedness of global financial markets has been on the rise in recent decades which is evident, among other signals, in an increase of correlations among the major financial markets.  Point in case: The recent credit crisis, with its epicenter in the US, rapidly advanced to Europe and to most emerging economies as well.  This week’s chart of the week gives yet another indication of how the global financial system has been experiencing economic strains in tandem.  Courtesy of iMFdirect and Reza Moghadam comes a good illustration of how the impact of market stresses has changed over the years.  Particularly illuminating is the increasing significance of emerging markets.  While prior financial crises may have been contained to the advanced economies before, judging from this chart, it has been much more difficult to find a place to hide...


Recommended Read 
We have been discussing the increase of correlations across various markets on numerous occasions.  More recently, there has been a trend among Mutual Funds and ETFs to increasingly track similar underlying assets.  Result:  Even higher correlations of individual funds with the overall market.  Please consider yet another sign of a disturbing trend:  Contrafund's Danoff Stymied as Correlation Frustrates Top Stock Pickers 

Six of the 10 largest U.S. stock funds show correlations of 0.99 this year, meaning they moved almost completely in sync with the market. Managers are struggling to stand out and attract new money as fear of another crisis prompts investors to move in and out of markets without discriminating between securities, industries or geographies. Robert Doll, BlackRock Inc.’s chief equity strategist, said while stocks moved in lockstep before, this is the longest he has seen correlation persist across markets.

With that in mind, you may want to check your current holdings of mutual funds and see how they fare against the market.  If they correlate with the market anywhere close to the 10 largest stock funds, you should not be paying more than the typical low-cost index fund. 

Recommended Video
The Financial Times featured an interview with Jean-Claude Trichet, president of the European Central Bank.  Mr. Trichet gave some insights on the lessons learned from the recent financial crisis as well as the more recent sovereign debt crisis of some Southern European nations.  Central Bankers, much like most economists, have a way of dodging direct questions.  However, Mr. Trichet was relatively straightforward in this interview.  When asked whether he believed that the worst of the financial crisis was over, he noted:

We have to remain permanently alert, I call that credible alertness. My sentiment is that this succession of challenges seems to be very much a structural feature in the present world because we have a number of very powerful underlying reasons: Technology, Flash trading, Shadow banking.  Technology is moving at extraordinarily high speed.  We have globalization, we have the fact that the magnificent success of China, India, Brazil and Russia and the other emerging world are there and they call for enormous structural changes.

More to the point, and very much in line with our theme of highlighting the increased correlations and inter-connectedness of financial markets, Mr. Trichet had the following to say:

We had a silent revolution, the G20 substituted the G7 countries; the governance of the world is now fully shared with the emerging economies.


Good luck and good investing!

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