SUMMARY  Markets have been unfolding much as we expected. The worst of the Eurozone crisis lies ahead, and the global implications of that alone can undermine whatever Obama and his merry men might conjure up in coming weeks. But such crises create opportunities which are rare, so patience remains the key ingredient. 

Last time we again highlighted our target for 4800 on the FTSE 100 index. We hit this level on 10th August, and it acted like a spring board, catapulting the index briefly above 5400. We also noted the problem with Spanish and Italian bond yields – shortly afterwards the ECB took highly effective action to drive yields down to 5% (away from what would have been the catastrophic level of 7%).

Now what? Morgan Stanley (who you ignore at your peril) produced research admitting that the pillars which had underpinned their positive analysis earlier in 2011 had all been undermined. They weren’t the only investments house to issue a similar mea culpa.

Morgan Stanley now believe the US stock market (and therefore developed western markets as a whole) are in a secular (multi year) bear market, and that for the US stock market to appear “cheap” in this context it must fall at least 50% in the years ahead.

Nonetheless, there will be short term opportunities for profits, or to further reduce risk, depending on your dexterity and risk tolerance. And while indebted developed economies struggle, we believe that the opportunities to invest cheaply into Asia and emerging markets will be historic (in the same way that corporate bonds were early in 2009). Patience is key.

Looking at the UK stock market, we expect another foray into the 4600-4800 range for the FTSE 100 index, probably driven by further problems in the Eurozone. But we are also close to a raft of US initiatives which could buoy markets from those lower levels.

For example, we will hear of new initiatives to create jobs in the US, and action to assist their mortgage holders. Then later in the September there is a Federal Reserve meeting where we expect action (variously called Operation Twist or Torque) to reduce the yield on long bonds.

Quantitatively this could be on a similar scale to QE2, and it will have an impact on markets. But how much?

Following the setting up of QE2 (in August 2010) the US stock market rose by nearly 30% (the UK by 15%). Right now our technical indicators suggest it could drive the FTSE 100 index back towards 5400, up from below 4800. But over such short periods, this is merely punditry, prologue rather than prediction.

Ultimately we know the impact of QE2 in the US was limited – or we wouldn’t be headed into another recession. And if markets do enjoy a bounce later in September (from lower levels than prevail now), the background will still be fundamentally uncertain. Most significantly, the worst of the Eurozone crisis lies ahead, and the global implications of that alone can undermine whatever Obama and his merry men might conjure up in coming weeks.

So be patient for now. Such crises create opportunities which are rare.