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Prieur Perspective: New Appetite for Risk


Investors turn to equities; commodities like oil, precious metals.

The Dow remains the only major US index still in the red for the year to date, and along with the FTSE 100, one of the few global indices in this unenviable position.

As far as non-US markets are concerned, returns ranged from top performers Macedonia (+10.8%), Croatia (+10.2%), Nigeria (+9.9%), Namibia (+8.5%) and Peru (+7.8%), to the Czech Republic (-6.6%), Denmark (-5.7%), Saudi Arabia (-4.4%), Latvia (-4.2%) and Côte d'Ivoire (-3.5%), which experienced headwinds.

(Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

Emerging markets (especially the BRIC countries) are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are outperforming the developed ones is a sign that global investors are taking more risk - a necessary ingredient for stock markets in general to show a further improvement.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the leaders for the week included Claymore/Delta Global Shipping (SEA) (+10.5%), iShares MSCI Hong Kong (EWH) (+10.4%) and HOLDRS Merrill Lynch Market Oil Service (OIH) (+10.4%). Poor performers were all things "short," with notable laggards being ProShares Short MSCI Emerging Markets (EUM) (-4.5%), ProShares Short QQQ (PSQ) (-4.1%) and ProShares Short Russell 2000 (RWM) ( 3.5%).

Further confirmation that the various central bank liquidity facilities and capital injections are having the desired effect of unclogging credit markets, comes from the Goldman Sachs' Financial Stress Index (FSI). This index includes 4 factors related to the degree of impairment of financial markets: counterparty risk (US dollar 3-month LIBOR-OIS), liquidity risk (mortgage-backed security [MBS] to treasury repo differentials), refunding risk (commercial paper outstanding) and broader risk aversion (percentage of monies held in money-market mutual funds in relation to equity market capitalization).

As shown in the graph below, the FSI is now at its lowest level since the beginning of the credit crisis in August 2007.

The decline of the US dollar and the rise in bond yields took on new momentum during the past few weeks. Deepening anti-dollar sentiment caused bets against the greenback on the Chicago Mercantile Exchange to rise to their highest level since the onset of the financial crisis, reported the Financial Times.

Richard Russell (Dow Theory Letters) said:

"The US Dollar Index is sitting on what I term 'the edge of the cliff.' If the dollar falls apart, we're dealing with a whole new story - it will affect almost all investments, US and foreign. The sliding dollar is already putting pressure on Treasury bonds, particularly the long-term maturities. This is causing our creditors (think China) to cut back."

The graph below shows that the sovereign debt bubble may be in the midst of bursting.

The higher Treasury yields had a negative impact on mortgage rates, with the 30-year fixed rate increasing by 29 basis points to 5.27% on the week, and the 15-year fixed rate by 25 basis points to 4.87%, as indicated by Yields on mortgage bonds for the first time exceeded the levels at which they were trading before the Fed's announcement of expanding Treasury purchases to reduce lending rates. This raises the question of whether the Fed might soon increase its Treasury buy-backs.
No positions in stocks mentioned.
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