My opinion on chart configurations is clear-cut: they are excellent indicators of market psychology. On the other hand it takes external forces such as special developments at the corporate, economic or geopolitical level to trigger major movements. Those who are talking about a backslide into recession should try and imagine what that really means. In the last quarter of 2008 the global economy was stalled, and we are not about to see that happen again barring exceptional circumstances.
Fear of a double dip is the markets' alibi, but the real reason for their decline lies elsewhere. It is rooted in the sovereign debt crisis, which prompted deleveraging (i.e. sales of positions bought with borrowed money) on a massive scale. The absurdity of the story is that by seeking refuge on the other side of the Atlantic, investors drove Europe to adopt austerity plans while allowing Uncle Sam to continue running up its credit card issued by the US Treasury. The worrying thing is that once budget discipline has taken hold in Europe, the same investors will bring their money back over here and reverse the euro's downtrend against the dollar.
Meanwhile German exporters are all smiles: this summer, instead of shutting down for lack of work their factories will be working overtime. Company results will project a steadier image of the economy, in the short term at least, and this should reassure the markets. Economies are growing again, largely thanks to the totally abnormal environment of rock-bottom interest rates.
Stockmarkets are attractively valued as a consequence. But since they are not behaving logically, a bet on equities at present is riskier than usual and investors would be better off buying in stages. They could wade in further if the European debt crisis were to flare up again later this summer or in the autumn.
On the other hand, it is still far too early to be interested in the euro again, although the idea will likely be worth pursuing in 2011 since there are no fundamental merits underlying the dollar's appreciation.
Patience is key, for this year's returns will come over a very short period. The important thing is to avoid giving up too much ground. This summer will no doubt lend itself to a bit of trading.
Frédéric Binggeli - Le Temps - Monday 9 July 2010