Two down and one to go. Having navigated past QE2 and the US mid-term elections, investors have another biggie in the coming week - a Group of 20 summit meeting that threatens a global clash of currencies. The result could have broad implications for the flow of money into emerging markets and the returns on current holdings.
Not that, from a risk standpoint, you could tell in the aftermath of the Federal Reserve's decision to spend $600 billion in a quantitative easing (QE) asset-buying programme. The Fed managed the neat trick of beating expectations but not in a way that spooked the markets by implying that the US economy was in a worse state than feared.
So it was risk on, with MSCI's all-country world stock index rising to levels last seen before Lehman Brothers collapsed, the seminal September 2008 event that turned a bear market into a rout. Emerging market debt spreads against US Treasuries shrank to their narrowest in three years.
The prospect of massive dollar-printing to fund the Fed programme, however, hit the dollar. The week's losses took the US currency's depreciation against other majors to nearly 15 percent since June, when global fears about eurozone sovereign debt began to ease.
Which brings us back to the coming week's G20 summit in South Korea, where currency disagreements are likely to dominate and the pre-meeting rhetoric has been far from diplomatic. At its simplest, the row involves Washington accusing Beijing of keeping the yuan low, versus a lot of other countries angry about what they see as deliberate dollar devaluation risking their export growth and fuelling domestic inflation.
Jeremy Armitage, global head of research at State Street Global Markets, said the immediate risk for investors might be for some emerging market economies to increase barriers to investment flows to cool their currencies. "I would expect to see more calls for capital controls," he said. Longer-term, however, the fear is that the row will prompt a protectionist trade war, which would have wide, negative implications for many global investments.
In a joint report to the G20, the Organisation for Economic Co-operation and Development and U.N trade body UNCTAD warned that tensions over current account imbalances could slow investment or degenerate into a protectionist spiral.
"Capital controls and regulations to buffer economies from foreign exchange volatility and capital flows could lead to a fragmentation of international capital markets along national lines, and may be difficult to dismantle once in place," they said.
Whether any of this currency stress is enough to derail what is shaping up to be a big end-of-year risk rally remains to be seen. Heading into the new week, there is little evidence to suggest anything more than the odd daily adjustment is coming.
There are underlying supports for the rally behind QE. MSCI's all-country index, for example, may have risen nearly 32 percent last year and be en route for 10 percent this year, but some still think stocks are cheap.
Thomson Reuters Datastream shows one-year forward price-to-earnings at 12.2 times versus a 10-year average of 15.
In a similar vein, Reuters asset allocation polls showed that even though investors had moved into equities compared with earlier months, they still had a lot of cash to pour in.
In addition to this, global manufacturing activity has accelerated for the first time in six months, creating a situation in which an already improving world economy has been given a sharp monetary stimulus.
US jobs data added to the mix on Friday with a better-than-expected rise in non-farm payrolls, the first increase since May.
All this has left a lot of investors relatively bullish. Max King, strategist and multi-asset portfolio manager at Investec Asset Management, for example, sees three reasons why the end of the equity rally is not nigh:
-- too much money has been flooding into bonds;
-- value, earnings, sentiment and issuance make equities a long-term buying opportunity; and
-- economic growth could turn out better than expected. Even investors who withdrew from the market to avoid volatility around the QE decision have a longer-term faith. "Global equities are priced to deliver attractive returns," wealth managers at Ashburton said in a recent briefing.
There are always risks, of course, and the kind of debt stress that sent global markets into conniptions earlier this year has raised its head again. Borrowing costs in the eurozone's weaker economies rose sharply in the past week with Ireland's troubles particularly in focus. Plans to cut spending and raise tax totalling 6 billion euros in 2011 were seen as "unrealistic" by some market players.
There was a bit of a spill over into others such as Spain and Italy, but the impact has mostly been contained. The issue may have become more localised as a result of international support mechanisms. But the risk is there, so maybe it is two down, two to go.