Economics & Strategy

Buying Time

—Sean Darby, Global Head of Equity Strategy

Equity markets left off from their strong finish last quarter by rallying further as both breadth and volume improved. The ECB’s ring fencing of the euro-zone crisis by the announcement of the OMT was quickly followed by the Federal Reserve’s open QE3 which surprised markets by its open-ended commitment.

Stabilization in global macro data alongside earnings revisions arresting their recent declines helped investor sentiment. The main difference in the rally seen at the end of the quarter was the much greater participation with turnover expanding. This ought to remove fears that the rebound in shares lacked conviction because of the thinness in volumes. Another piece of evidence pointing to improving sentiment was the corresponding sell-off in bonds.

Technically, shares have become overbought in the short-term. Equity markets are likely to remain well bid as institutions attempt to reweight going into year-end. The recent central bank action has put policy makers ahead of the market since the financial crisis surfaced in Europe. The fiscal problems in Europe and the U.S. are not over by any stretch of the imagination, but the policy makers have bought time, the most precious commodity.