Market Outlook – June 2011

WORLD

Risk aversion is in the ascendant

Over the last few weeks markets have had to contend with an array of issues that have increased risk aversion. One of the primary drivers behind the risk off trade has been the open rift between the ECB and the EU finance ministers over whether or not to allow Greece to restructure its debt. This has not only generated concerns over the health of the European banking system but also resurrected systemic contagion fears, with Spanish bond spreads widening significantly. The euro has fallen 5% against the dollar in response to the mounting uncertainty. Adding to the overall confusion, the markets still expect the ECB to increase interest rates another notch in the summer even though this clearly creates adverse financial conditions for the peripheral economies. What seems evident is that even if the Greek bond restructuring/bailout issue is sorted out soon, the underlying solvency crisis in the periphery is a long way from