This week's thought-provokers for investors

(PresseBox) ( Zürich, )
Equity markets corrected sharply after Italy came into focus of contagion fears in the European debt crisis. They did not manage to recover as the week progressed. In contrast, Swiss, German and US bonds rallied, confi rming their role as safe haven investments in times of uncertainty, even amid the ugly debate about the US debt ceiling. Gold reached a new high just below USD1600/oz, while the euro fell to a new low of 1.15 against the Swiss franc.

Moody's Investors Service has downgraded Ireland to junk status, lowering the country's foreign and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. This follows a similar junking of Portugal several days ago, and adheres to the same logic: The new expectation is that private sector involvement will likely be required for any further bailout.

It has become a key factor in Moody's ongoing assessment of debt-burdened euro area sovereigns that the prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt.

The European Banking Authority (EBA) will publish its new 2011 stress test results for 91 of the region's top lenders today at 1600 GMT. There have been rumours that as many as six Spanish banks have failed the European stress tests, including fi ve savings banks and one medium-sized bank. These banks may have failed the tests, as generic provisions - cash put aside by the banks to cover potential losses - would not be counted as core capital. It is interesting that especially German banks have attacked the publication of detailed information about their holdings in the new report, despite expectations that most of these banks will pass these tests. Meanwhile, Italian and French banks do not seem to share the German concerns.

There is mounting concern in Europe about this second and more granular bank stress testing, which is supposed to build broader market confi dence by clearly isolating and identifying weak spots in the fi nancial system. Amid the current mood, it could worsen the sovereign debt crisis in the eurozone and encourage even more speculation against fi nancial institutions.

UK infl ation slowed in June for the fi rst time in three months. Consumer prices increased 4.2% from a year ago but were down from 4.5% in May. Core infl ation eased to 2.8% in June from 3.3% the previous month.

Slower infl ation is likely to reduce pressure on the Bank of England. The BoE is currently tolerating price growth above its 2% target to aid the economic recovery as long as there remains a good chance that price growth will ease to the bank's target in two years.

China's annual GDP rose by 9.5% in the second quarter 2011. This was below the rise of 9.7% in the previous quarter but beat expectations of 9.3%. Compared to output in the fi rst quarter, China's GDP growth even accelerated slightly in the April-June period. Separate data also showed that industrial production in June was much faster than expected, rising 15.1% from a year earlier versus 13.3% in May and expectations of a slowdown to 13.1%.

This allows for a continuation of anti-infl ation policies and makes it a little bit easier for the PBOC to keep a balance between its fi ght against infl ation and preventing the economic expansion from slowing too sharply. The consumer price index in China surged to 6.4% in June from the previous year, and high infl ation could trigger public discontent and social unrest in the world's No. 2 economy. But a material slowdown in economic expansion and wealth development may have similarly upsetting eff ects.

Infl ation in India accelerated to 9.44% in June, from a year earlier, well above the annual benchmark wholesale-price increase of 9.06% in May but still below the analysts' median estimate of 9.68%. The increase in food prices reached 8.31%.

In line with its immediate priority to reduce soaring infl ation, the Reserve Bank of India is likely to increase its repurchase rate by another 25bps to 7.75% later this month, despite having already raised interest rates for a record 10 times in the last 16 months. Other central banks in the region stopped raising rates in July on concerns that the European debt crisis and slowing global growth might hurt Asian economies.

Stefan Angele, Member of the Executive Board Head Investment Management

Stefan Angele is Head of Investment Management at Swiss & Global Asset Management (formerly Julius Baer Asset Management) and member of the Executive Board. He joined Julius Baer Asset Management in September 2006 as Managing Director and Head of Asset Allocation & Fixed Income. Before joining Julius Baer, he held various positions including Head of Institutional Asset Management at Zürcher Kantonalbank. He also worked in Portfolio Management and Private Banking at Credit Suisse. He graduated in economics from the University of Zurich. He also holds a Swiss Federal Diploma for Financial Analysts and Portfolio Managers and is a Certifi ed European Financial Analyst (CEFA).
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