The strong rebound in equities this month reflects plentiful liquidity and an absence of bad news. The Dow Industrials, however, closed last week 7% above the “six-bear average” – the largest positive deviation since July. With major data and event risk through early November, a pull-back would be no surprise.
A post on Friday suggested that China needs to ease monetary policy soon to avoid a bumpy economic landing. India provides a lesson in overkill – real M1 was allowed to contract significantly and industrial output has subsequently slumped.
The hope here, based on recent monetary trends, is that US economic resilience will outweigh Eurozone weakness, sustaining global expansion. Solid September retail sales fit the scenario and hint at a recovery in the key ISM manufacturing new orders measure.
The best measure of investor sentiment remains in “panic” territory despite the recent rally. Add in “excess” liquidity and a possible turn in the global economic cycle and it is easy to paint a bullish scenario – if the negative dynamics in the Eurozone can be arrested.
