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The bulls appear to have the upper hand.

Since the lows in March, the S&P 500 has surged about 30 per cent, the FTSE 100 is up 21 per cent, the pan-European FTSE Eurofirst 300 has risen 26 per cent and the Nikkei 225 Average has jumped 25 per cent.

Yet, this powerful rebound does not sit easily with the still woeful news flow of poor economic data, deteriorating company results and the threat of another pandemic – this time swine flu – that could match the Sars crisis of 2003. Even news on Thursday that car giant Chrysler was about to file for Chapter 11 did not significantly undermine the new mood of optimism.

Anthony Bolton, the star asset manager and president of investments at Fidelity International, boldy stated on Thursday: “All the things are in place for the bear market to have ended.”

It is not just equities that are rebounding. The credit markets, the US junk bond market, emerging markets and commodities, such as oil, are all on the rise.

These markets, however, are taking their cue from the impressive gains in stocks, with cyclicals and financials, which were responsible for bringing the markets to their knees, leading the way higher.

It seems strange to recall that only two months ago analysts were predicting the first depression since the 1930s, deflation, and widespread bank nationalisations.

However, this extreme pessimism has helped to provide the platform for the rebound. With key economic indicators deteriorating less quickly, many investors have found reasons to buy – or at least stop selling.

Company results have also been viewed through a positive prism. Although they are still deteriorating, they are not as bad as they were, particularly among banks. Upside surprises have included Wells Fargo, the second-biggest US home lender, and JP Morgan among the banks, and Ford and Apple among the corporates.

Corporate earnings on the S&P 500 were minus 43 per cent for the fourth quarter of 2008 compared with minus 36 per cent so far in the first quarter.

Analysts also believe the effects of the record fiscal and monetary stimulus programmes may also have started to feed through into the broader market, with the US Federal Reserve uprgrading its economic forecasts this week.

In particular, economists have upgraded their growth forecasts for China, which announced a huge stimulus package in November. Consensus forecasts for Chinese growth are settling around 8 per cent for 2008, which should boost those economies that rely heavily on the country to sell their exports.

This has all helped to lift confidence and restore risk appetite.

Robert Parkes, equity strategist at HSBC, says: “You have to remember where we were before the rally. The markets were pricing in depression.

“In effect, the market is now pricing in a recession. The economic data is deteriorating, but not as sharply as it was.

“The banks are also key to the rise in sentiment. Fears of nationalisation or some going out of business have receded. Corporate earnings may still be bad, but they are not as bad as they were in the fourth quarter of last year.”

He adds: “Markets tend to move up before economies do. We think the markets may go on rallying for another six months.”

Gary Jenkins, head of fixed income at Evolution, says: “Equities lead the way. When they cheer up, the rest of the markets tend to cheer up, too. A lot of the growing confidence stems from the fact things are not as bad as they were.”

Other markets pointing to improving sentiment and returning risk appetite include the US high-yield corporate bond markets, which saw their best ever monthly return in April; emerging markets, which have seen gains of around 40 per cent in the past eight weeks, and oil, with prices for crude stabilising around $50 a barrel, and off the lows close to $30 a barrel at the start of the year. Government bond prices, which benefit from uncertainty, have fallen sharply since the start of March.

The Vix index, Wall Street’s fear gauge that tracks volatility, also fell below 35 on Thursday – to lows just before Lehman Brothers collapsed in September. Moreover, in credit markets, the iTraxx Crossover, an index of mainly junk bond credit default swaps, has fallen from 962 on April 1 to 805 on Thursday.

However, there are still many sceptics, who point out that this rally has the hallmarks of yet another false dawn.

Richard Batty, investment director at Standard Life Investments, says: “We have not bought into the eight week rally because we are still worried about structural issues.”

He believes the world is still in the middle of a deleveraging process that will hold back bank lending. House prices in both the US and UK are likely to keep falling, he says, which will put pressure on bank balance sheets as the vast amount of mortgage-backed securities that account for so much of their losses are worthless.

“We think the markets will remain volatile and move sideways. We are not convinced the economic data are strong enough yet to suggest we are out of this downturn,” he says.

In other words, it could be a case, to quote the market cliché, of “sell in May and go away”.

Albert Edwards, a strategist at Société Générale, who has long been a bear, says: “The current pop in the market is not dissimilar to the many bear market rallies between 1929-33, where signs of economic stabilisation were met with strong 25 per cent rallies, most especially in late 1929 and mid 1931. This optimism was subsequently crushed.”

Additional reporting by Nicole Bullock in New York

Copyright The Financial Times Limited 2017. All rights reserved.
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