Indeed the first days of this month looked likely to prove the forecasters right but two weeks ago that changed and since then we’ve been in what looks like a “Read My Lips Rally”. Those whose lips we read, were central bankers and G20 finance ministers and their message, if you hadn’t got it before, was crystal clear. We will not risk the economic recovery by early withdrawal of the huge stimulus in the system.
In other words don’t worry for now about hikes in interest rates, don’t worry about exit strategies from quantitative easing, take our money and go invest, invest in growth. And funnily enough that’s precisely what’s been happening. Institutions flush with stimulus cash are still ploughing into the most cyclically sensitive areas. In stocks, oil and gas, resource stocks, industrials and banks have outperformed, base commodities have risen and so has gold, also helped by the weakness in the dollar which is taking over from the yen as the world’s funding currency.
And here’s the real kicker: even as we get the best stock quarter ever, yields on government gilts in that period have hardly budged, again a by product of the stimulus as provided by the Bank of England’s quantitative easing. Indeed, while markets look ahead for their valuations, central banks’ monetary policy has to be guided by lagging economic data for a while. This means we can create an environment, where both equities and bonds rise in tandem, but the $64,000 question is for how long? When can economies stand on their own two feet without the need for support? The next big test is likely to be the October earnings seasons. If earnings don’t rise on improved sales, this rally will falter.
Ross Westgate co-presents Worldwide Exchange and anchors Strictly Money each weekday on CNBC.