An improving global economy, solid corporate earnings and even easing fears about eurozone debt have been more than enough to rationalise the rising hunger for riskier assets now prevalent on financial markets. Investors, however, are about to get a reality check.
The coming week features a dollop of economic data from the United States and China, a heating up of the fourth-quarter earnings season, and a meeting of European Union finance ministers to beef up their debt bailout provisions.
Equity markets come into this at multi-year highs, with the MSCI all-country world index at levels last seen in September 2008. Corporate earnings are robust. Intel Corp, for one, had a rosy outlook for early 2011. Mega US bank JPMorgan also had better-than-expected earnings and saw stability and growth returning to global capital markets to boot.
US and Chinese economic data, meanwhile, have been strong enough to prompt banks such as Morgan Stanley to forecast a 2011 global growth rate above the long-term average, in this case 4.2 percent against around 3.5 percent.
Reality check one should be the EU finance ministers meeting. It follows a series of relatively successful bond auctions in Portugal, Spain and Italy that eased some concern about the ability of debt-strapped peripheral eurozone economies to finance themselves. Any sign of a consensus at the EU meeting on expanding the European Financial Stability Facility and/or firm proposals to buy back peripheral sovereign debt from secondary markets should add another stabilising effect.
But the impact of the crisis itself is getting harder to gauge because the appetite for stocks and other higher-yielding assets among investors has translated into most sovereign bonds in developed markets falling out of favour.
This means that any rise in peripheral debt yields is not necessarily tied to fears of default in Greece, Ireland, Portugal and so on. It might just be linked to moves into riskier assets and away from bonds in general.
Such a phenomenon can already be seen by comparing not just the spreads between peripheral bond yields and the German Bund yield - which have narrowed in January - but by the direction both have been moving. "In earlier days (of the crisis), when spreads widened, we saw a substantial decline in German yields. Everybody started to buy Bunds," said Kommer van Tright, a bond manager at Dutch fund firm Robeco. "Towards the end of last year and this year as well, peripheral trouble does not translate in to a demand for Bunds."
Some idea of the current demand for German debt will come on Wednesday with an auction of two-year bonds.
Reality check two is global growth. The big driver behind the past few month's growing risk appetite has been increasing evidence that the global economy is doing nicely, including in the United States and China. US recovery has been strong enough to persuade investors that a double dip recession is off the cards, but it still has deep problems.
Comments
Comments are closed.