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MOOD OF OPTIMISM SHOWS LITTLE SIGN OF ABATING
Equities and other risky assets climbed to 2009 highs yesterday as the mood of optimism over the global economy showed few signs of abating.
The annual gathering of central bankers at Jackson Hole in Wyoming over the weekend saw several officials claim that the world economy was pulling out of recession – although with the caveat that much work still remained to be done.
“As is often the case there was something for everyone – optimists can point to officials' growing confidence that the worst is over, while pessimists will note the near-universal view that the recovery will be slow and bumpy,” said Julian Jessop at Capital Economics.
“For us, the key message from Jackson Hole was therefore that monetary policy is likely to remain ultra-accommodative for the foreseeable future – at least for the next several years.”
Steve Barrow at Standard Bank said it was important to bear in mind that central banks would not start tightening policy just because the economy was showing signs of improvement.
“For as well as being cautious about choking off any fledgling recovery, policymakers will have to bear in mind the huge output gaps that have developed,” he said.
“Evidence suggests that core [non-energy] inflation only starts to rise again once the output gap has been closed.”
Mr Barrow pointed out that in spite of growing hopes for a global recovery bond yields had remained relatively low. Indeed, yesterday saw further buying of government bonds in spite of the improvement in risk appetite – the 10-year Treasury yield was down 4 basis points at 3.53 per cent and the 10-year Bund yield was 3bp lower at 3.29 per cent.
Kim Rupert at Action Economics suggested that stock and bond markets had traded in recent weeks as if they “were from different planets”.
“Most global equity markets have been buoyed by recovery enthusiasm – while bonds have been boosted by concerns the recovery will be stilted,” she said.
“This war of worlds won't be won or lost this week, but after mostly upbeat comments from central bankers at last week's Jackson Hole symposium, the onus will be on data to prove stocks are over-valued.”
There were few signs yesterday that investors felt valuations to be overstretched just yet, as leading equity market indices reached fresh 10-month highs.
By midday in New York, the S&P 500 was up 0.6 per cent, while the FTSE Eurofirst 300 index rose 0.9 per cent. In spite of the advance, the Vix volatility index – often described as Wall Street's “fear gauge” – rose 1 per cent to trade back above the 25 level.
Asian stocks markets put in even stronger performances. In Tokyo, the Nikkei 225 Average jumped 3.4 per cent to close just a whisker off a recent ten-month peak, while Seoul ended at a 13-month high and Taipei enjoyed its best one-day rise for two months.
Chinese stocks also enjoyed a steadier session in the wake of last week's turbulence.
Jan Loeys, global head of market strategy at JPMorgan, said a stable equity market was particularly important for China as it was a precondition for the successful resumption of IPOs and the ambitious capital market reforms planned in the near term.
“We believe that the Chinese authorities will take measures to put a floor under stock prices in the event of further correction,” he said.
