In my opinion, it seems as if the spring rally has probably exhausted itself. It's difficult to envisage how much of a pullback we might see, but I maintain that it will still be part of a bottoming process. I'd nevertheless assume a defensive position, as a bigger and longer correction than what many pundits are expecting cannot be excluded.

For more discussion on the direction of stock markets, also see my recent posts Gold, Gold, You’re Making Me Old, Albert Edwards: Expect New Equity Lows in H2, China Is Global Achilles' Heel, Video-O-Rama: Regulatory Reform Dominates Debate, Stock Markets: Retreat in Store?, The Recession in Historical Context, Technical Talk: S&P 500 Turning Down from 950 Again, and Have Stock Markets Run Away from Reality?. (And do make a point of listening to Donald Coxe’s webcast of June 19, which can be accessed from the sidebar of the Investment Postcards site.)

Economy

“Global business sentiment is much improved during the past 3 months. Most notable is the optimism regarding the economic outlook toward the end of this year. Assessments of current business conditions and the strength of sales have also measurably improved,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, confidence is still weak and fragile, consistent with an ongoing global recession.

Although the European Central Bank (ECB) has warned that Eurozone banks face additional losses of more than $283 billion this year and next, German investor confidence, as measured by the ZEW Economic Sentiment Index, rose to a 3-year high in June. The improvement suggests that investors are more confident that the worst of the financial crisis and recession has passed. However, the ZEW Current Situation Index remained around its 6-year low in June, indicating that the German economy remains in recession.



“‘Green shoots’ is no longer the favorite phrase among policymakers. During last weekend’s meeting of Group of Eight (G8) finance ministers, the message shifted to emphasize that it was far too early to sound the all-clear for the world economy,” writes the Financial Times.

“I don’t think we’re at a point yet where we can say we have a recovery in place,” said Tim Geithner, US Treasury secretary, and continued this theme a day later by saying “it is early still” and “we have a way to go." Britain’s finance minister, Alistair Darling, said “we’re not there yet," and the IMF’s Dominique Strauss-Kahn said “the recovery is weak."

Focusing on the country that seems to have cruised best through the economic malaise, the World Bank raised its growth forecast for China’s 2009 gross domestic product to 7.2% (from 6.5% 3 months ago), saying the apparent success of the government’s stimulus package had improved the outlook from March, as reported by the Financial Times. The bank estimates a full 6 percentage points of this year’s 7.2% GDP growth will come from investment and spending either carried out by the government or directly influenced by it.

According to US Global Funds, another validation of China’s economic recovery is provided by the recent growth in government revenue, thanks to rising business tax receipts. “Going forward, a virtuous cycle may set in when improving private sector activity encourages corporate expansion, which in turn benefits employment, income growth, and consumption.”