As discussed earlier, with most traders taking the next 1-2 weeks off for vacation, global markets remain on auto pilot, hitting new all time highs overnight driven by strength out of China where reflationary spirits have returned after industrial commodities surged on speculation that the PBOC's recent attempt to contain excess liquiduity have failed (explaining the 3 consecutive days of reverse repo drains). Meanwhile, as SocGen's Andrew Lapthorne writes, global equity markets continue to move higher, with both MSCI Developed and Emerging adding 0.4% last week. DM Is now up 12.4% in 2107 and EM an impressive 23.8% higher.
Most markets saw gains last week, with Europe playing catch-up, having tracked down or sideways for the last few months. In local currency terms, the Eurozone is still in negative territory over the last few months, but this is more than made up for by the strength of the currency, with the MSCI Eurozone index up 5% in USD over the same timeframe. That said there were a few soft patches. The Nasdaq was down, as was the S&P 500 on an equal-weighted basis. The Russell 2000 dropped 1.2%. Japanese small cap growth stocks also faltered with the volatile Mothers index falling 3.9%.
Will the euphoria continue? For the answer look at the Euro. As SocGen's Andrew Lapthorne writes, earnings momentum appears increasingly polarised, "with the US enjoying its usual reporting season bounce on the back of analyst upgrades, and both Pacific ex Japan and Japan seeing sharp improvement in analyst optimism." However both Europe ex UK and Emerging Markets, the standout US dollar performers this year, are yet to see a pickup in upgrades, with downgrades remaining more common. A big reason for this is the recent surge in the Euro, which is fast approaching 1.20, the level beyond which analysts have said any further gains will have an adverse impact on earnings.
What about fundamentals? Here there is far less confusion, and as Lapthorne writes, "stock valuations remain remarkably high, but as valuations alone tell us little or nothing in terms of market timing, it seems valuation concerns are increasingly ignored."
No surprise there: in a market in which only capital flows (into ETFs) matter, fundamentals are ignored.
That said - the SocGen strategist continues - "if individual stock valuations are largely unhelpful for timing markets, their correlation with future (one year forward or more) returns is relatively good."
Today's levels infer paltry low single digit future returns if we use history as our guide. Just to get back to average US enterprise values would need a 30% fall from here. Surely that should still be a concern?
Judging by today's latest and greatest all-time high in the MSCI World index, we can safely say that the answer - still - remains a solid no.