Money Matters

The New Year certainly started with a bang, with both commodities and equities registering strong gains. But it was not to last.

Peter Lucas, Investment Strategist at RBC Wealth Management, has put out a note on why equity markets  relinquished their gains (and then some):

1. Tighter Chinese monetary policy: The Chinese economy has bounced back strongly in response to the decisive easing in monetary and fiscal policies instigated in the aftermath of the 2008/9 downturn. Indeed, the annual growth rate is now higher than it was when Lehman Brothers collapsed. But having recovered soonest and sharpest, China was always going to have to tighten policy before everyone else. And so it has proven.

2. Banking reform: In response perhaps to flagging popularity, President Obama has recently announced plans to restructure the banking system, restoring the split between normal banking activities and riskier proprietary trading. Although this may be a prudent step in terms of trying to avoid future banking crises, in many quarters this has been viewed as an unhelpful hindrance to bank lending, just as the economy is showing signs of life.

3. Greek tragedy: In my December note I talked about the challenge facing certain EU countries like Ireland and Greece. These countries are under pressure to reduce their budget deficits (through higher taxes and spending cuts) at a time when their economies are already reeling from busted property bubbles and the Credit Crunch. The more they raise taxes, the weaker their economies; and the weaker their economies, the lower the tax-take. It’s a vicious spiral from which it will be hard to escape, particularly given that they are no longer able to devalue or print their way out of trouble.

He says the recent volatility in the Greek bond market is a foretaste of what is to come and as such he is looking to sell the euro, commodities and equities.