Equities ignored amidst euro-focus

Such is the understandable focus on Europe right now that almost unnoticed this month has been the very powerful improvement in global equity markets. Just as well,

it could be argued, after a dreadful August/September when the investment skies were so dark that Armageddon loomed. Since the end of last month, the major bourses in both Europe and the US are up by around 10%. For the year thus far, US equities are little changed, the FTSE is down nearly 6%, the DAX has dropped 11% and the CAC-40 has fallen 15%.

The dramatic recovery reflects a number of factors. Firstly, both traders and investors became über-bearish, so there has been a degree of short-covering that has propelled the rally. Also, some savvy investors who had spare cash recognised that the equity risk premium became so elevated that equities represented exceptional value. The more constructive mood has definitely been aided by European leaders displaying greater urgency in dealing with their sovereign debt and banking crisis. Additionally, the American economy seems to be chugging along again, with FedEx last night claiming that the US outlook was looking healthier – back in the summer, recession seemed around the corner. The Fed has implemented a twist, with some speculation that it might opt for more quantitative easing over coming months; the ECB looks set to cut rates before too long, and the BOE implemented significant additional asset purchases. Corporate earnings in the US for Q3 have been healthy. Interestingly, volume throughout this relief rally has been light, implying that participation has been low.

The perky performance in stocks coincides with a powerful jump in high-beta currencies. For instance, the Aussie is up 9% month-to-date, the BRL 8%, and the Norwegian krone 6.5%. If risk appetite is encouraged by what Europe announces tomorrow, then these risk currencies might see some further gains.