Capital markets in the US and Europe continue to mark time, somehow appearing directionless. It is worth noting that the defensive sectors, particularly utilities and tobacco shares had a tough day, banks fared much better, perhaps a sign that investors are looking to add more beta to their portfolios. Shareholders of Mothercare also had a bad day, as the stock fell 30% after a weak trading update. The retail sector continues to struggle in general, as they suffer from a lack of disposable income and structural changes to the industry.
The release of the Fed minutes appeared to play down the near term likelihood of further tapering. Some reference was made to an increase in leveraged loans and the quality of those loans, which some will see as a cautionary word. The minutes did go on to report that most risk asset valuations were within historical norms. There was some debate, apparently, about changing the inflation and employment thresholds but was decided against this for fears of sending out a confusing message.
On Thursday we get to hear from the European Central Bank, I expect no change to interest rates. Wednesday saw the release of the eurozone unemployment data, the euro zone unemployment rate remains unchanged for the 8 month in a row at 12.1%. Retail sales data, also released, did show signs of improvement, which some market commentator's saw as a further sign of a recovering euro zone economy. The gap in unemployment rates within the eurozone is startling. German unemployment rate currently stands at 5.25% and Spain at 26%, French unemployment stands at twice the level of Germany at 10%.
Germany, were they outside the euro, would not have near zero interest rates with an unemployment rate at 5.2%, they would more likely be happy with interest rates at 2-3%. The rest of Europe needs to see the ECB to introduce some of the measures that Mr Bernanke and the rest of the Federal Reserve have employed to stimulate the US economy, used within the euro zone. What is worth noting is the current strength of the peripheral bond market. Ten year bonds in Spain now yield just 3.9%. Spain is not the only country within the eurozone to see confidence return to its bond market, as Italy, Greece and Portuguese yields have all fallen recently. Markets are built on confidence, and at present there seems to be a confident air developing in the euro zone economy. When you see the structural differences, for example, the unemployment rates you still have to question whether all the eurozone troubles are completely behind us.