FYI | May 25 2006
By Rudi Filapek-Vandyck
The past week was the second worst in history for global market sentiment as measured by Credit Suisse, only beaten by the crash in October 1987.
On Wednesday last week Credit Suisse’s Global Risk Appetite Index fell out of the so-called Euphoria zone, a significant event since the index had remained in the zone since the final quarter of 2005, with the exception of one single day.
The longest period of global market euphoria thus came to an abrupt end on Wednesday by sinking below 5.0 but as the index kept on falling it reached 3.8 on Tuesday, which, the broker points out, is the index’s lowest level since October last year.
The overall fall in investor sentiment is shown as one straight vertical line from the highest index point in twenty years to land back at the level of eight months ago – a scary sight, if anything. As said in the opening paragraph, the index’s fall from 7.3 on May 11 to 5.2 on May 15 was the second biggest two-day fall in its history.
To add to the significance of the event: the broker’s global risk appetite index lost four whole points in the span of 11 days. If one comes to realise this is from a high of 7.3 one doesn’t need to think any further to seek to explain the magnitude and force of the recent sell-off: investors all ran to the exit gates, it is that simple.
It hasn’t made Credit Suisse’s global equity strategists happier than they were before the event. Credit Suisse is among the worry beads who believe that core inflation is definitely picking up, globally, and this does not spell good news for share markets or commodities. It’s a cyclical thing. The mildly positive news, as far as Credit Suisse sees it, is that global economic growth is slowing, and this will somewhat cap the growth of inflation.
That’s the bad news. The good news, according to CS, is that the underlying trend in global economics remains midly disinflationary, so inflation in the world as we are experiencing it today should ultimately be kept in check because of greater supply (as opposed to greater demand) and by global labour shortages.
The debate about how severe wage pressure will become, especially on the skilled end of the Western markets, is still raging. At Credit Suisse, the strategists stick to a mildly optimistic view: wage pressures will increase, but it won’t go through the roof. It is therefore that the team expects to see a limited cyclical rise in core inflation only. Credit Suisse therefore doesn’t believe there lies a drastic tightening of central bank policy rates beyond the horizon.
Having said that, the team doesn’t think the time is ripe to start aggressively buying resources stocks either. Not yet. Overall investor appetite for riskier assets is not expected to recover significantly in the short term. Not until we have seen a deeper correction in industrial commodity prices, the strategists argue, and until bond yields look to be peaking. Only then will the overall climate for riskier assets improve again.
Conclusion: global economic growth has to slow down, to keep inflation in check. If this scenario unfolds a platform will be created from which riskier assets, and global equities, will benefit again later in the year and possibly into 2007.