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Markets may be near turning point, global economy the worry

By Ross Finley and Rahul Karunakar
October 08, 2015 02:30 IST
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Nearly half of the 20 indexes polled globally are now expected to end the year lower than where they started

Currencies, stocks and bonds appear to be at a turning point, according to the latest Reuters polls from around the world, with the size and nature of forecast changes suggesting worries are building about the health of the global economy.

The latest sharp revisions to currency, stock market and government bond views coincide with another global growth downgrade from the International Monetary Fund, and reports that some of the world's biggest investors have been having a rough go of it in recent months.

The results also come just at the start of what is expected to be a tough US earnings season, with many companies having warned profits won't look as good as they have, following what was the worst quarter for stocks since 2011. Companies in emerging markets have been feeling the pain for longer.

Apart from a rally that began late last week on hopes the Federal Reserve holds on to zero interest rates for longer - an easy policy tonic for stock prices over the last half decade - global stock markets have run into trouble recently.

Equity market strategists polled by Reuters have slashed their forecasts for where top indexes will go over the next year by their biggest amount since March 2009, when most of them hit their nadir amid the worst financial crisis in generations.

Nearly half of the 20 indexes polled globally are now expected to end the year lower than where they started - not typical at all coming from the most naturally optimistic analysts in financial markets one can find.

Foreign exchange strategists have boosted their forecasts for the US dollar once again, despite a view spreading across financial markets that the Fed is not likely to raise the fed funds rate from zero until well into next year.

That means something else is afoot. Many strategists are clinging to hopes the Fed will start raising this year, but others remain concerned investors will gravitate toward the dollar, the world's reserve currency, as a safe haven.

"Any respite is still likely to be temporary, and nerves are likely to remain on edge," wrote Vincent Chaigneau, head of fixed income and currency strategy at Societe Generale, referring to any rebound in risk assets.

"We want to be positioned for a renewed outbreak of economic pessimism, expectation of further policy easing, and renewed commodity/resource price softness. Dollar strength will persist not so much because of Fed tightening, but because of further easing by other central banks," he said.

The path of least resistance for most central banks remains to cut rates further wherever they can. China's has cut rates five times over the past year and the Reserve Bank of India just slashed rates once again, and by double the amount expected.

Where central banks can't cut any further - most notably the euro zone and Japan - the expectation is that very soon they will opt to ramp up already aggressive securities purchases. That suggests their ability to prop up share prices is waning.

Emerging market currencies, which have taken a beating over an extended period since last year that has intensified for countries like Brazil, are set for more trouble as investment continues flowing out of these economies.

"We think a sustainable emerging-market rally will remain elusive," Brown Brothers Harriman strategists, led by Win Thin, wrote in a research note. "Indeed, the best we can probably hope for in 2016 is stabilisation."

Despite protestations from Fed officials that they still intend to raise rates before the end of the year, bond markets have caught a whiff of trouble, with sovereign yields in developed economies falling and forecasters also taking a knife to their expectations.

Real estate prices, even in expensive markets, are soaring once more as investors park cash in housing or take advantage of near-zero interest rates.

Recent Reuters polls forecast further house price rises in Britain, the United States and even in Canada, where debt-strapped households are increasingly stretched.

Commodity prices, which most analysts thought at the start of the year would be rebounding by now, remain depressed on diminished demand from China, the world's most voracious consumer of commodities, as well as a dimming global outlook.

The latest Reuters oil price poll put Brent crude prices at an average $58.60 a barrel next year, the lowest forecast since a poll in March 2007 and chopped by nearly $4 in just one month. Only eight months ago, analysts thought it would average nearly $72 a barrel in 2016.

Other recent Reuters surveys found global asset managers based in Europe, the United States and Japan lifting bond allocations to their highest in nine months, as well as making the most conservative equity recommendations in at least five years.

To be sure, not everyone is gloomy. Equity strategists at Citi have just come out with a bullish outlook for world stocks, expecting another 20 per cent by the end of next year.

Even they admit that is a "brave" call though, given that their own chief economist Willem Buiter has forecast a global recession during the same period.

"While Willem Buiter's recession outcome would imply a 0-5 per cent (earnings per share) contraction, we suspect that global equities have already moved to price in a mild EPS contraction," wrote Citi's global strategist Robert Buckland.

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Ross Finley and Rahul Karunakar in London/Bengaluru
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