Rumour has it…

Last week saw a continuation of the markets ‘risk on’ trade, as investors became more worried about what they were short / underweight of as opposed to what they were invested in. We are very much in a ‘buy the rumour’ phase with regard to the plan to be submitted to G20 Head of State during the Cannes Summit on the 2-4th November.

The enlargement of the EFSF (European Financial Stability Facility) was eventually approved last week, following some internal political wrangling in Slovakia. With this enlargement approved, the proposal to ‘leverage’ the EFSF fund by using it as an insurance tool on sovereign debt, coupled with a simultaneous hair-cut of Greek debt (rumoured to be 50%) and a predicted simultaneous recapitalisation of the banks (to attain an anticipated 9% core tier 1 ratio), that seems to have the support of countries and industries (ranging from China to Allianz) is finally beginning to look credible. Political credibility is something that we have been in short supply of recently and the prospect of it returning has certainly buoyed the market.

The meeting between the G20 Finance Ministers over the weekend gave us nothing, but this in itself may be construed as positive news – gone are the ‘sticking plasters’ and in their place there is a definite recognition that this time the solution must be ‘bullet-proof’.

Although sentiment towards the above is dominating trading patterns we did have a US retail sales number released last week that was sharply above expectations, suggesting that the all important US consumer does still have a heart-beat! Consequently we are beginning to see the first UPGRADES to US Q3 GDP coming through. Some economists are also suggesting that a ‘hard landing scenario’ increasingly being priced into the Chinese markets may well be ‘holed’ by a confirmation of 9.3% GDP growth in Q3 (out on Tuesday).

Market update