Looking back its amazing how the overall market picture of S&P in 2009 matches the moves in 2003, so its no surprise that the year ended with more of the same ...
Looking into 2010 will financial markets follow the scripts of 1993/1994 or 2003/2004 or something total different considering that the circumstances are very different now.
The three market scenarios we work with in Limus Capital for 2010 are:
- Sweet spot
- V-Shape
- Crisis 2.0 (Double Dip)
Interest rates in the US and to some degree in Europe have gone up in December following the better than expected US NFP early in the month. A key question is if the move is a V-Shape inspired move or a Crisis 2.0 move as bond vigilantes are giving up on countries with too large fiscal deficits and funding requirements.
In any case the next US NFP on January 8 will be very important for fixed income and therefore also equities if the experience from 1993/94 and 2003/2004 will carry any weight in 2010. The 1993/94 are more in the V-shape camp whereas 2003/04 would be more like a Sweet spot
A 1993/1994 replay:
In 1994 the key driver for the move was the surprising rate hike from FED in early February 1994 which we very likely will not get this year. But anyway one good January was what we got in 1994 before equities fell.
A 2003/2004 replay:
In 2004 the equity rally from 2003 carried two months into the year before some fatigue hit the market late in Q1. As in a potential Sweet spot scenario for 2010 the equity rally early in the year was supported by positive fixed income markets. S&P did move in a very narrow range in the first half of 2004.
Considering the starting point for 2010 the odds are very high that the development in 2010 will have much less comparison to an other time period that what we saw in 2009 that looked so much like 2003. But one thing for sure is that the development in sovereign bond yields could go a long way in shaping financial markets in 2010.
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