Monday, January 11, 2010

Downunder Daily Starting with a Bang

Downunder Daily
Starting with a Bang

It’s another oddly predictable (odd, because it seems predictable) strong start to a new year for
risk assets. In recent years, only 2008 was weak from the get-go, an accurate omen of the annus horribilis that unfolded. Year-to-date, all the major equity markets are up, with the Japanese Topix index the best performer (another omen, in our view) – see Exhibit 1.

We think 2010 will be a more difficult, complicated year than either of the past two, which were, in a sense, straightforward. Consequently, we’re on high alert for when the risk asset rally will falter and, if we’re correct in our big picture view, reverse. Already there’s evidence
of greater discrimination, something apparent in the uneven performance between equity markets.

For now, however, we see no imminent threat to what remains a supportive mix for risk assets. We think the sweet spot will sour this year, but not yet. Here’s the good news:

First, the macro data remain consistent with moderate expansion in developed economies, and something better in emerging economies (notably, Asia). The macro data are no longer surprising expectations as they did through the middle quarters of last year, but there’s no pervasive sense of disappointment. Exhibit 2 shows the ‘surprise indices’ for Europe and the US. Both are near zero (data broadly arriving in line with expectations). [morgan stanley]

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