By Mike Peacock
LONDON, March 29 (Reuters) – After a bumper first quarter
fuelled by central bank largesse, investors are looking for
potential potholes to derail a stock market rally which has
already shown signs of tailing off in recent days.
While a holiday-shortened week is not likely to prompt
dramatic investment decisions, the consensus for now is that
there may be more gains ahead but at nothing like the same pace.
“The upside potential in the equity markets is not exhausted
yet; however, we no longer expect above-average returns in the
coming months,” said Philipp Baertschi, chief strategist at
wealth manager Bank Sarasin.
Equities have certainly been going great guns.
The S&P; 500 is set for a 12 percent gain since the start of
the year and, despite wobbling over the past week, Japan’s
Nikkei is still up more than 19 percent, its strongest
first quarter rise in 24 years.
Aside from signs of a burgeoning U.S. recovery, the turn in
sentiment was powered by the European Central Bank’s creation of
more than a trillion euros of three-year money, augmented by
more money printing by the Bank of England and hopes that the
Federal Reserve would do the same.
A repeat dose is now looking less and less likely, making
for a very different investment climate, despite warnings over
the past week from Fed chief Ben Bernanke and the Bank of
England’s Mervyn King that recovery remains highly uncertain.
Reuters’ latest asset allocation polls showed global
investors cut government debt from portfolios in March, slashing
holdings of U.S. bonds to a six-month low as hopes for more
Federal Reserve bond-buying faded.
“Government yields, close to generational lows, still look
unattractive and we expect Treasury yields to bubble higher over
the next few months as the euro zone risk premium is unwound and
as the market adjusts to the reality of better economic data,”
said Nick Gartside, International CIO for Fixed Income at J.P.
Morgan Asset Management.
For developed markets, European purchasing managers’ indices
– which have a strong correlation with GDP – will be a
must-watch in the week to come as will equivalent reports from
China.
As the PMIs will do in Europe, so Japan’s tankan survey of
major manufacturers will offer a gauge as to how far the
Nikkei’s rally could stretch.
The biggest report of the week will be U.S. non-farm
payrolls, out on Good Friday when the rest of the financial
market world is closed.
The European Central Bank and Bank of England will hold
policy meetings before the Easter break. Neither will shift
course but debate about the policy turning point is now evident,
at least within the former.
Jens Weidmann, who heads the German central bank, is leading
a push by a group of ECB policymakers for the bank to prepare
for a shift to exit mode, fearing that inflationary pressures
will be stoked and banks will become completely addicted to
state support.
Investors will also pick over the details of Spain’s 2012
budget, which faces implementation risks, and the details of
euro zone plans to build a stronger firewall which appear to
have settled on a less ambitious option than some members were
seeking.
EMERGING CASE?
After strong runs by the major world stock markets there are
suggestions that select emerging markets may be the next
beneficiaries.
Reuters polls published on Thursday predicted emerging
markets will spearhead any further rise of global stocks this
year, with Russia and Brazil leading the way.
Gartside highlighted Russia’s successful sale of $7 billion
in Eurobonds in the past week.
“Emerging market debt continues to be one of our top picks
as do other spread sectors such as high yield, where both
fundamentals and valuations look good,” he said.
The coming quarter will certainly throw up further euro zone
risks and high oil prices pose a real threat to the world
economy.
Aside from the market verdict on the bloc’s bailout arsenal,
elections in Greece could weaken austerity resolve and the
French may elect a socialist President intent on rewriting the
bloc’s new fiscal rules.
“We think that the current benign phase in the European
markets could continue for several more weeks. Nonetheless, we
believe that volatility and wider spreads will return to
sovereign bond markets in the not too distant future,” Justin
Knight and Beat Siegenthaler at UBS wrote in a client note.
The International Energy Agency (IEA) said oil consumer
nations are set to pay a record $2 trillion this year for oil
imports if crude prices do not fall. Crude hit $128 a barrel
this month, only $20 short of its 2008 peak, and is up
more than 15 percent since January.
If crude were to stay there for the rest of the year, oil
import bills would cost 3.4 percent of GDP, up from 3.1 percent
in 2011, IEA chief economist Fatih Birol said.
“The crude oil price remains at a high level and
uncertainties over Iran do not suggest a quick downward
correction. How will a weak recovery be able to bear an energy
bill that could remain high for a long time?” Credit Agricole
analysts asked in a note to clients.
