Calyon Morning Credit : Market Comment

by Calyon Capital Markets Research

MARKET COMMENT

Equities were weaker again yesterday, moving closer to the technical definition of a market ‘correction' – a fall between 10% and 20% over a short period of time. The S&P 500 closed 7.0% below its June peak, the FTSE 100 8.12% below its peak and the Eurostoxx 600 7.8% below its peak. We have argued for some time that valuations look too high – the market simply moved forward too quickly and fundamentals have lagged. The upcoming second quarter earnings season might become the catalyst that leads to a ‘correction', as it has drawn investor attention to something more tangible than sentiment: earnings. It looks like only a matter of time before the 10% fall from the peak is breached. We believe there could be some unpleasant surprises in the earnings season and it takes only a few to move markets downwards. Hence, we see a correction of more than 10% as likely, but would argue that 20% would be too much the other way, as valuations would fall close to levels seen in March when markets were pricing in a global depression. For the equity markets to get to those lows, the S&P 500 would need to fall by 28.5% from its peak, the FTSE 100 by 22% and the Eurostoxx 600 by 26.5%. Hence, a market correction of 20% would bring us too close to those valuations for our liking...