City Watch: The eurozone remains the ‘elephant in the room’, says Charles Sylvester

Charles Sylvester of Charles Stanley & Co

Charles Sylvester of Charles Stanley & Co

Throughout most of June the markets fell quite sharply, acting as a reality check for those who must have thought recently that investing in equities was one-way traffic.

However, in the last week or so, UK economic growth forecasts would appear to have bottomed out and there have also been a number of company upgrades coming through, as a result equities have started to perk up again.

The “elephant in the room”, though, is still the eurozone; someone wrote a couple of weeks ago that the region was passing through the “eye of a hurricane” and sooner or later the crisis might re-ignite. More recently high profile problems in Portugal seem to have confirmed this, but Portugal is not alone.

Once again Greece is on the brink of failing to qualify for its next tranche of aid from the Troika, Cyprus is attempting to renegotiate the terms of its rescue package, whilst both Italy and Spain remain deeply embroiled in political and economic uncertainty. The markets are well aware of these issues and the recent spike in bond yields reflects these concerns. However for the time being this crisis appears to have infected the region’s periphery rather than its core.

What could hole the experiment below the waterline would be a migration of this crisis to the region’s heartland, or more to the point France. Judging by the French bond markets, investors remain sanguine, with yields indicating no sense of imminent crisis, despite Mr Hollandes’ poor standing in recent opinion polls. However, it is seldom a question of what one knows (if it’s in the press, it’s in the price), but what one doesn’t that counts for everything.

Beneath the surface macroeconomic conditions in France are giving cause for concern; significantly it has been noted recently that its current account balance over the past decade has shown a pronounced deterioration. The percentages in question, circa 2.3% of GDP, may appear small to investors but they are in fact highly significant and will, if unaddressed impart significant consequences on the financial markets.

: : Charles Sylvester is an investment manager with stockbroker Charles Stanley & Co in Ipswich.