What is bothering the markets?

The past few weeks have seen economic data and news flow playing out across the markets each week. If 2009 was all about banks, then 2010 is panning out to be all about countries, or more specifically the amount of sovereign debt and the associated fears of potential default.

Taking centre stage at present is Greece, but waiting in the wings are Spain, Portugal, Ireland and Italy. The current issues in Greece and the implications across the wider European Union are making an understandably uncertain market even more nervous. Monetary policy decisions are likely to be a constant worry for investors throughout the year.

The unprecedented, co-ordinated actions of Central Banks across the world successfully averted a full blown economic crisis in 2009, but now the focus is on how the stimulus packages employed are unwound. China began the process by reining in bank lending in January. Its decision surprised markets and sparked a sell-off. A second announcement in February elicited a more benign market response. Markets do not like surprises and so Governments across the world will need to be cautious and considered in their approach to removing support and dealing with their mounting debt burden.

As corporate earnings season drew to a close, the general trend was one of positive surprises, driven by top sales growth rather than cost cutting like last quarter. Markets reacted on a stock specific basis rather than to the overall trend, most notably with the positive reaction to Barclays' profit announcement.

We have seen good news coming through from leading and lagging economic indicators but markets are nervous and seem to be reacting more on the bad news than on the good. In the UK, a lot hinges upon the impending General Election with markets seemingly watching the polls closely. A potential hung parliament remains a concern and is the least favoured outcome. We expect markets to remain volatile over the short-term and retain our defensive bias within our equity portfolios.

Elsewhere our position is fairly neutral as we wait for a significant trend to emerge. We remain vigilant in our search for short term opportunities to exploit whilst retaining a firm eye on the long term objectives of our portfolios.