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Prieur Perspective: Stock Uptrend Resumes as Economy Rebounds


Investor confidence in the recovery of the global economy gains traction.

After starting the week with a broad-based sell-off, stock markets resumed their 5-month uptrend as investors' confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.

Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said:
"There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.

"We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy 'running out of gas' on its own."
The past week's performance of the major asset classes is summarized by the chart below -- a set of numbers that indicates renewed investor appetite for risky assets.

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.

The MSCI World Index (+1.6%) and MSCI Emerging Markets Index (-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for 3 weeks running.

According to fund trackers EPFR Global (via the Financial Times), equity funds investing in China had their worst week since first quarter 2008, while outflows from equity funds targeting global emerging markets and Asia ex-Japan recorded 24-week and year-to-date highs respectively.

Top performers in the stock markets this week were Cyprus (+7.0%), Turkey (+6.5%), Greece (+5.9%), Poland (+5.9%), and Sweden (+4.2%). The top positions were all occupied by European countries where the region could emerge from recession sooner than previously expected. At the bottom end of the performance rankings, countries included Nigeria (-9.3%), Taiwan (-5.1%), Kyrgyzstan (-4.2%), Qatar (-4.0%), and Australia (-3.8%).

After surging by 90.7% since the beginning of the year to its peak on August 4, the Chinese Shanghai Composite Index plunged by 19.8% over the course of the following 11 trading days, but clawed back 6.3% during the last 2 days of the week as pundits realized that the tightening of monetary policy in China was not imminent. The Japanese Nikkei 225 Average (-3.4%) fell in tandem with the Chinese and other Asian markets.

The S&P 500 Index, back above the psychological 1,000 level, has surged by 51.7% since the March 9 low. "One argument the bears use is that we saw a number of similar bear market rallies that were this extreme during the overall 86% decline that the market saw from September 1929 to June 1932," said Bespoke. "However, as shown below, the current rally is now bigger and longer than any of the rallies seen during the 1929 to 1932 crash. The biggest rally during the '29 to '32 period was 46.8% over 148 days."

No positions in stocks mentioned.
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