IHAG: Quarterly report, Interest rates 2006/2009 (10-year), Currencies 2006/2009, Equity indices, Global sector trends. Gold fever the harbinger… Of turbulent times ahead?

The markets waited with bated breath for the reporting season‘s corporate earnings figures. Although most companies exceeded analysts‘ estimates, after an initial rise the markets couldn‘t sustain the trend and gave up their gains. This time round, there was less potential for positive surprises,
and «better than expected» reports disappointed secret hopes that they would
be «much better than expected».
Some market participants thus seized the day to lock in the year‘s gains before 2009 is over.
On balance, however, the rather ponderous tug-of-war between sceptical «bears» and more confident «bulls» produced a positive result for the quarter. At least the feared correction never happened. All key indices were in positive territory as we went to press just before the end of the year. The US market, in particular (Dow Jones Index +8%), advanced until mid-November on the
strength of generally positive macroeconomic data and the prospect of still-low interest rates.
The rise on the European markets was a little more reserved (+2% CAC 40 to +4% DAX 30). Significant performance differentials between individual sectors were a striking feature once
again. Shares in basic materials (+16%) continued to soar, while the crisis-hit banking sector (-5%) ran out of steam after a strong performance in previous quarters – hardly surprising given announcements of «mammoth» capital increases. There were very few attractive alternatives to equities. All of the major central banks anticipate a hesitant recovery and are therefore waiting with any major rate hikes, so short-term rates hovered around zero. There were no appealing opportunities to be found in government bonds either, as interest rates have generally risen – sharply in some cases – in the wake of downgrades for certain European states, and warnings to the USA and the UK. CHF rates were the exception. Risk premiums on corporate bonds had already fallen heavily over the
summer. Simmering worries about inflation and fear of a potential crisis in the fiat currency system triggered a bout of gold fever, taking the price to new highs before an 8% correction curbed speculators‘ enthusiasm. The oil price mostly moved along a price corridor of between 74-80
dollars that is acceptable to producers and consumers.
Should the sharp rise in the gold price be seen as the harbinger of a possible currency crisis, or runaway inflation?
Although such fears aren‘t entirely unfounded, we don‘t share this extreme view at present. It will be
crucial that central banks – as they have said they will – now move slowly away from quantitative easing. At the same time, industrialised states must gradually bring their high public sector deficits under control, without damaging their economies.
It is a balancing act which demands a great deal of sensitivity and poses the risk of failure. It is therefore very much worth considering building up a gold allocation as a hedge against such extreme scenarios. In any event, gold can continue to look forward to rising (albeit volatile) demand from the jewellery industry, hedge funds, end investors and central banks – not least because there is a lot of liquidity available.
By contrast, the current phase of the market lends little appeal to government bonds. High public-sector debt and the long-term inflation threat are too off-putting. Although there is still the risk of a correction among equities, we continue to see potential for selected stocks. Equities with high, sustainable dividend yields, a strong market position or considerable pricesetting power are likely to come through any correction relatively unscathed. These companies also benefit most from the failure
of their weaker competitors. At the same time, their stock offers a degree of protection from inflation should – against our current expectations – prices rise faster after all. We also see attractive equities in the technology and industrial sectors, where energy efficiency and water treatment are among the promising issues. Where currencies are concerned, we anticipate the USD to strengthen against the JPY, CHF and EUR in the short term. The latter is likely to remain in difficulty owing to the massive problems faced by some member states and its close ties with Eastern Europe.
Global sector trends
Dow Jones Sector Titans 1.1.– December 2009, in USD

Basic resources	80.4%
Automotive	53.5%
Technology	50.8%
Chemicals	50.8%
Financial services	47.8%
Banks	36.3%
Media	34.0%
Composite	28.3%
Industrials	27.6%
Food & beverage	26.5%
Construction	26.2%
Retail	26.1%
Noncyclical goods & services	22.3%
Energy	22.1%
Cyclical goods & services	16.3%
Pharma	14.2%
Insurance	10.2%
Telecommunications	8.6%
Utilities	0.9%

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Useful link: Privatbank IHAG Zürich A.G.

. Currencies to continue to fall against gold, dollar rally unsustainable, Fed audit a good move, credit crisis for America and England, small gains in some places, plunges elsewhere, The rally in the dollar and the problems for other currencies prove what we have been saying and that is all currencies will continue to fall vs. gold. The impetus for the dollar rally originates as usual with the government and is added to by the disarray in the economies worldwide, particularly in Europe. One of the things central banks have never learned is that financial engineering only works for a short duration, after that the problem worsens. Even the world’s strongest currencies, the Swiss, Canadian, Aussie and Norwegian, are only holding their own versus gold