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Prieur Perspective: Goodbye Safe Havens, Hello Risky Assets


Upbeat sentiment fails to take some potentially disturbing trends into account.


"Goodbye safe havens, hello risky assets." This was the investors' theme song during the past week. Safe-haven assets were out of favor, as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors' appetite for reflation trades such as equities and commodities.

Investors' sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a 3-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.

As to be expected given the countless catalysts, the past week's trading was bumpy, but the major global stock market indices nevertheless managed to resume their 8-week rally. Further testimony of investors' zest for risky assets came from the following:

  • a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs - despite the fact that humans cannot contract swine flu by eating pig meat)

  • tighter credit spreads (especially high-yield corporate bonds)

  • a jump in Treasury Note yields to levels last seen in November a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies).
The performance of the major asset classes is summarized by the chart below, expanded to now also include Treasury inflation-protected securities (TIP) and investment grade (LQD) and high-yield corporate bonds (HYG).

Marking 8 straight weeks of gains, the MSCI World Index advanced by 1.6% (YTD -2.6%) on the week, the MSCI Emerging Markets Index by 2.3% (YTD +16.9%) and the NASDAQ Composite Index by 1.5% (YTD +9.0%) - the NASDAQ's longest advance since December 1999. After recording declines during the prior week, the Dow Jones Industrial Average (+1.7%; YTD -6.4%) and the S&P 500 Index (+1.3%; YTD -2.8%) also added to the gains notched up since the rally commenced off the March 9 lows.

Global indices also celebrated solid gains for calendar month April, with the MSCI World Index (+10.9%) recording its top monthly advance since January 1987 and the MSCI Emerging Markets Index (+16.3%) its strongest monthly showing since December 1993. The S&P 500 (+9.4%) had its best month since March 2000, placing the Index in the middle of its top 20 monthly gains since 1950.

Click to enlarge

Using 4-day performances for markets that were closed for the May Day (International Workers' Day) holiday on Friday, returns around the world ranged from top performers Indonesia (+8.7%), Ireland (+8.4%), Greece (+8.1%), the Czech Republic (+6.9%) and Turkey (+6.7%) to Luxembourg (-4.7%), Bulgaria (-4.0%), Malta (-2.7%), Macedonia (-2.6%) and Oman (-2.5%), which experienced selling pressure. The Mexican Bolsa Index surprised by only declining 3.0% amid swine-flu fears. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

By the end of last week, more than 70% of the companies in the S&P 500 Index had reported first-quarter earnings. According to Bespoke, the Index's annual decline in earnings (first quarter '09 versus first quarter '08) on Friday was of 32.3%. This compares with analysts' estimates of -37.4% at the start of the earnings season. Also, as shown in the graph below, the percentage of companies beating earnings estimates has been rising steadily during the reporting period to 62% on Friday. "With 3 quarters of companies having already reported, this earnings season is shaping up to be one of the best in years," said Bespoke.

No positions in stocks mentioned.
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