Stockmarkets have been enjoying a “World Cup bounce” of late, says Neil Hume in the FT. The MSCI World and the FTSE 100 indices had posted their longest unbroken upswings in nearly a year by Monday. China’s decision to allow the yuan to appreciate (see page 7) further bolstered risk appetite. America’s S&P 500 index, which sets the tone for world markets, hit a four-week high. Yet it’s no wonder the rally appeared to stall on Tuesday – a sustained market upswing is unlikely any time soon.
The fuss over the yuan “allowed markets temporarily to forget the somewhat dismal raft of… economic data emanating from the US in recent weeks”, says Jamie Chisholm on FT.com. Weekly jobless claims have been rising. Meanwhile, the housing market continues to weaken now that government support for first-time buyers has ended.
The Economic Cycle Research Institute’s weekly leading indicator index has slumped to a 45-week low. This has had a good forecasting record since the 1960s and proved “remarkably accurate in predicting the last recession”, says Emily Kaiser on Reuters.com. It is now signalling a “marked slowdown”. Further sharp drops would point to a double-dip. “We have better than a 50% chance of a recession in 2011,” says John Mauldin on Investorsinsight.com.
The underlying problem is that much of the Western world is still working off the hangover from the credit binge. So private demand is set to be lacklustre for some time, says Mark Gongloff in The Wall Street Journal. And now it can no longer count on government stimuli to temper the impact of deleveraging as more and more countries are “feeling compelled to rein in their borrowing and spending”. That means growth is likely to falter. But if governments don’t cut back, bond yields, and hence long-term interest rates, could rocket, says Lex in the FT. That would also lower demand. And equity investors “lose either way”.
Austerity packages are set to dent growth and profits further. Albert Edwards of Société Générale highlights a “savage slide” in global analysts’ upgrades to earnings forecasts. There is also still the danger of a hard landing in China, while Europe’s sovereign debt problem won’t be resolved quickly. As Gongloff says, “there are few bright spots” for global stocks.