Prieur Perspective: Prepare for Volatile Uptrends
Keep your eye on emerging and commodities-related markets.
For some reason, the lyrics of Electric Light Orchestra's classic, "Livin' Thing," keeps resounding in my head: "You took me, ooh, woah, higher and higher, baby. It's a livin' thing … " followed by, "It's a terrible thing to lose … ."
But let me get on to the review of the financial markets.
Investors (or should I say Johnny-come-latelies?) last week again favored the reflation trade on the back of better-than-expected US earnings announcements and economic data, indicating that the trough of the recession might be behind us -- or at least, might be stabilizing at depressed levels.
Newsweek's cover declared: "The recession is over," but a footnote stated, "Good luck surviving the recovery," implying a hard and treacherous slog ahead -- note the pin below the "liquidity-inflated" balloon.
Tempering the bullish sentiment, David Rosenberg (Gluskin Sheff & Associates) commented as follows on Friday's announcement of a 1.0% (quarter on quarter annualized) contraction in the second quarter's real GDP:
"While we are past the most pronounced part of the downturn, it may still be premature to call for the end of the recession merely because of the prospect of a positive third-quarter GDP result. After all, we saw GDP advance at a 1.5% annual rate in last year's second quarter, and if memory serves us correctly, the NBER did not subsequently declare the end of the recession. And even if the recession is ending, as we saw in 2002, that does not guarantee a durable rally in risk assets. Sustainability is the key, and it remains the wild card."
Many global stock-market indices reached new highs for the year during the course of the week, and the S&P 500 Index closed in on the roundophobia 1,000 level. Other beneficiaries of investors' continued interest in risky assets included commodities, oil, gold (rebounding strongly after a midweek sell-off of $24 an ounce), high-yielding currencies, and corporate bonds. On the other hand, the US greenback remained out of favor and the Dollar Index closed the week at its lowest level for the year as investors shunned safe-haven assets.
The past week's performance of the major asset classes is summarized by the chart below -- a set of numbers that again indicates investors' increased risk appetite. In the case of government bonds, a lukewarm response to the US GDP report took the edge off a poor response to the massive issuance of paper by the Treasury.
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below. As the second-quarter corporate results in the US came in thick and fast, the American and other markets extended their rallies to 3 straight weeks in most instances. As a matter of fact, if not for the down week of the Dublin ISEQ Index, the entire table would've been green. But then again, "green shoots" seem to be frowned upon by many pundits.
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