Friday, December 2, 2011

GLOBAL MARKETS WEEKAHEAD-Too early for Christmas rally?

LONDON (Dec 2): Investors may be cheered by this week's liquidity move by the world's top central banks and interest rate cuts in key emerging economies, but more is needed to sustain the risk rally into the new year.

Wednesday's joint central bank move to ease tensions in European bank funding via swaps came as China eased monetary policy and Brazil cut interest rates and tax.

This is raising expectations that Group of 20 powers are finally taking coordinated action, lifting world stocks by 8.6 percent at one point in the past week.

The European Union summit on Dec 9 is now seen as a make-or-break for the 12-year-old single currency with policymakers under pressure to follow through with more measures. The focus is whether they will expand the role of the European Central Bank to become the lender of the last resort .

Until more clarity emerges, it would be difficult for investors to keep on buying risky assets.

"It smacks some sort of coordination. But it's only telling what they should've done. Support for the market came but it is still stressed and there's a question mark there," said Richard Cookson, global chief investment officer at Citi Private Bank.

"I take a gloomier view because you don't have any decent solution on the table. They're scrabbling around for solution. All the attention is centered on the ECB; whether it will blink."

Cookson recommends avoiding generally euro area assets and buying high-quality and non-financial U.S. investment corporate grade debt.

With so much uncertainty surrounding government bond markets, investors are also preferring to gain steady income from stocks of top-quality companies.

In the week ended Nov 30, equity income funds were the few sectors that took in fresh cash, according to Thomson Reuters' Lipper. This group pulled in $250 million in the latest week, extending an inflow streak that has had redemptions just nine times in the last two years.

"Global multi-nationals have low leverage and strong free cashflows and good dividend distributions. They are in a credit upgrade cycle," said Ashok Shah, chief investment officer at London & Capital.

"The credit downgrade cycle is in motion for OECD countries. This is the theme that will be played out in the next 5-10 years."


Many are still sceptical how sustainable the rally would be, but the benchmark MSCI equity index has risen at least 8.5 percent in the past week, its biggest weekly gain since November 2008.

What this highlights is that it can be very dangerous for investors to put too much tail risk hedging in place. It's such a policy-driven market that it can periodically lead to a very sharp rally in risky assets.

In October, stocks rallied more than 20 percent as European policymakers pledged fresh steps to aid European banks. The rally fizzled in November, but still hurt poorly positioned investors who got caught out by the positive policy response.

"You're left in an environment where heavy lifting had to be done by policymakers. It is a politicised market. Policy and policy shifts will continue to dominate market thinking," said Bill O'Neill, chief investment officer at Merrill Lynch Wealth Management.

"Correlation and volatility are very high and it is very difficult for asset allocators to diversify. Making tactical calls in this environment is a fearsome challenge."

That may be why some investors are starting to put risks back on. Reuters poll of 59 leading investment houses showed an increase in exposure to stocks in November, mainly as a result of demand for emerging market equities.

The difficulty of asset allocation is also emphasised by a shrinking universe of safe haven assets.

After a brief scare in German government bonds in November after a weak debt sale, investors will closely monitor another auction of German five-year note in the coming week.

Italy and Portugal are also scheduled to hold debt sale. - Reuters

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