As the oil price has rallied sharply over the past couple of days, and despite slightly disappointing manufacturing data from China and the US on Monday, there does seem to be a sea change of sentiment from investors as resource stocks rebounded sharply and profits have been taken in some of the bond proxy sectors. Natural resources were also boosted by the news that the Australian central bank cut interest rates again on Tuesday morning. This action reminds us that any signs of a weakening global economy central banks continue to be prepared "to do what it takes", and those who believe bankers are out of bullets may under estimate their resolve. Should this change in sentiment continue the FTSE 100 might well manage to shake loose the shackles of the past year and break the 7000 barrier.
More good news for risk assets came, as the New Greek government appears to be offering solutions to the current crisis in that region. Greek bonds rallied on the news, but the 2-year bond yield remains substantially higher than the 10 year, (an inverted yield curve) suggesting that bond investors still believe a Greek default is on the cards. The phrase beware of Greeks bearing gifts comes to mind, but as we have pointed out before, while the will of the Greek people is to remain within the euro, politicians should look for a solution that enables that outcome if at all possible.
Peter Jay writing in today's FT suggests that the world survived the breakup of the Russian rouble without causing too much pain in global markets, and therefore could survive the break up of the euro. One would hazard to suggest that comparing the position of the rouble in world financial markets, and that of the euro underplays the importance the euro now has within the financial system. One has to imagine the banking community had not leant quite as many roubles out to the rest of the world as it has euros! The euro is something that would not be created in today's world but now it exists the world has to find a way to deal with it.
Equity markets are defined these days by how quickly sentiment can change, no sooner does the world appear to be coming to an end that euphoria takes over. Much of today's broker research focuses on dividend baskets, or bond proxy investment portfolios, as those portfolios have outperformed over the past couple of years. In times gone by the portfolio's that banks strategists used to focus on were described as growth at a reasonable price or garp, hopefully one day they will return.