RPT-GLOBAL MARKETS WEEKAHEAD-Poised for a risk rally?

(Repeats Friday item without changes)

By Jeremy Gaunt, European Investment Correspondent

LONDON, Sept 3 (BestGrowthStock) – With little fanfare, equity
markets have started to rally, investors have become sated with
government bonds and cash levels are high enough to prompt a
search for better yield.

Heading into a new week, it is time to ask whether investors
are adequately positioned for a potential return to risk.

Reuters global asset allocation polls, published in the past
week, show equity holdings among leading international investors
at the lowest level in at least 6 years and bond holdings at the

But in both cases, the pace of decline/rise was levelling
off. [ASSET/WRAP] (For a graphic: http://r.reuters.com/duf48n )

With cash a solid 5.8 percent of portfolios, this reflects a
highly cautious state, but also one that could be taken as a
contrarian indicator. Indeed, ING said that money markets saw a
$4.1 billion outflow in the week to Sept. 1.

Some technical analysts, meanwhile, are scenting a shift in
the wind.

“Bearish sentiment is pervasive, fear is elevated,
conviction is non-existent, confidence is broken, volumes are
anaemic, yields de minimus … the perfect recipe for an
incendiary advance,” Richard Ross, global technical analyst at
U.S.-based brokerage Auerbach Grayson, wrote to clients.

There are some signs of change. World stocks as measured by
MSCI (.MIWD00000PUS: ) have risen more than five percent in a
little over a week as investors have returned from the Northern
hemisphere summer break.

They are still down 3 percent for the year, but 10 percent
above their 2010 low.

The frenzy for government bonds, meanwhile, is easing as
yields have tumbled. The Reuters polls show allocations to the
sector dropping to 55.8 percent in August from 61.2 percent
three months earlier.

Instead, investors have been snapping up investment grade
corporate debt, still a defensive play, but further up the risk
food chain. And some have been running from government debt in
anticipation of a sell-off.

“We sold our 30-, 25- and 10-year bonds last (week),”
Charlie Morris, head of absolute returns at HSBC Global Asset
Management told Reuters.
“We think that the big (government bond) rally over the past
three months is nothing to do with deflation at all. It is a
short squeeze … by hedge fund managers. So the thing to do is
sell your bonds.”


Taking heavily cautious positions, of course, is no
guarantee that things are about to turn around. There is no
reason why investors cannot become more cautious.

But the indications are that a level has been reached.

The CBOE Volatility Index (.VIX: ), the implied volatility
measure of the S&P 500 index (.SPX: ), settled into a range in
July and August that implies some risk aversion but not retreat.

The index was at 23 on Friday, more than 50 percent below
its risk averse May high.

“Vols have certainly come back to the lower end of the
range,” said David Shairp, global strategist at JPMorgan Asset
Management. “Equities (also) look very cheap on a risk premium
basis to bonds.”

But he said countering this are mixed macroeconomic data —
U.S. jobs data on Friday was better than expected — and
questions about whether central banks are going to embark on a
new round of quantitative easing, essentially buying bonds.

Some focus on the latter is expected in the coming week when
the Bank of England meets, although it is far from clear that
the UK economy is in enough trouble to warrant action.

July trade numbers from across Europe are also due,
following on from World Trade Organisation data showing world
trade volumes up 25 percent in the first half of the year.

Europe’s economy has been expected to slow but a
surprisingly robust Germany appears to be dragging at least some
of its peers along with it. [ID:nLDE6801HW]

A generally unspoken issue, in the meantime, is what impact
the mid-term elections — early next month and seen as punishing
President Barack Obama’s Democrats — may be having on U.S.

“Since 1914, the Dow (.DJI> has gained 49.2 percent on
average from its mid-term election year low to its subsequent
high in the following election year,” Auerbach Grayson’s Ross
(Additional reporting by Mike Dolan; Editing by Toby Chopra)

RPT-GLOBAL MARKETS WEEKAHEAD-Poised for a risk rally?