Wednesday, 11 March 2009

Stocks rally despite bleak economic news

Investors apparently felt much better about risk on Tuesday. Reuters reports:

The U.S. dollar slipped and world stocks rallied in their biggest single-day gain in three months on Tuesday after a Citigroup memo saying the troubled bank made a profit in January and February fueled the appetite for risk...

Gold fell more than 2.0 percent to below $900 an ounce while U.S. and euro zone government debt prices dropped as the rally in equity markets sapped any lingering safety bids...

MSCI's all-country world index jumped almost 5.0 percent, its biggest percentage gain in one session since a 5.7 percent rise on December 8.

Investors are now so focused on the banks that they largely ignored other negative signals on the economy.

The rally in stock markets came even as the International Monetary Fund warned that the world economy will likely contract in a "Great Recession" this year.

In further bleak news, European data suggested economic growth will contract sharply in the first quarter as France, Britain and Sweden reported precipitous falls in industrial output, and German exports dived.

But some would argue that stocks had fallen so much lately that they were due for a bounce anyway. Again from Reuters:

MSCI's all-country world index, a benchmark for major institutional investors, was trading just below 173 on Monday, roughly 2 percent above its October 2002 low of 169.48. If it falls below that, it will be at lows last seen 14 years ago in July 1995, before the Asian and Russian crises and when the internet bubble had barely begun...

World stocks as measured by MSCI have fallen 24 percent in roughly 2-1/2 months this year. It is already the second largest fall in the 22 years that the all-country world index has existed and more than half of last year's percentage loss of 43.5 percent. Mathematically, were it to keep losing at its current average rate of 22 points a month, the index would hit zero by year end.

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