Stock markets giving mixed messages
It's hard to equate market euphoria with the stagnant state of the global economy.
The MSCI index of global stocks on Friday jumped to its highest level since last August. The Dow is at a four-year high; gold a six-month high. Platinum rose 8% last week alone. Oil in New York went above $100 a barrel for the first time since May.
It's a return to higher risk assets - a "risk-on" rally - even as US industrial production fell at its fastest rate since 2009 and the German economics minister talked gloomily about a "dampened" economy in 2013.
Now for the reasons behind the headlines. Most important was the effect of America's third round of quantitative easing (QE3). But the bull run on commodities has other factors, some of them coming from a double squeeze from the supply and the demand side.
At the end of this last week, striking unions in the South African platinum industry rejected the latest wage offer from Lonmin, saying it was nowhere near the $1,500 a month they were demanding.
The effects of the unrest are spreading across the platinum belt and beyond: Anglo American Platinum has closed mines, Aquarius Platinum halted operations temporarily at one mine following clashes between protesters and police, and Xstrata has had to shut down a chrome plant.Downward trend
End Quote James Shugg Westpac Institutional Bank
We have seen the strange spectacle of markets rising when the economic numbers are weak and falling when the numbers are strong”
On the demand side of the equation, QE3 has had an effect of pushing money into (among others) the commodity markets. All that liquidity is looking for a home, and while policymakers would love to see it being dutifully lent out to struggling entrepreneurs and middling-sized companies desperate to build new plant, it won't. Gold and platinum look like a better bet.
Or do they? Remember platinum was in a pretty serious downward trend by the time the South African mining crisis came along. The metal is used to make catalytic converters in car exhausts. While the auto industry hasn't collapsed, demand has been stagnant, in Europe especially.
Gold too had its boom 12 months ago, and had in the first six months of this year lost some 20% of its value. Oil, intimately tied to economic growth, was also slipping lower. So, if you remove the South African crisis and QE3, prices look very vulnerable faced with the stark reality of near-zero growth.
The effects of QE look to be very limited. Indeed, the unwinding of the QE3 rally may be enough to knock the metals off their perch.
If it doesn't and you are an investor long on precious metals, you will have to live with the uncomfortable fact that if you make gains in the coming months, they will be due largely to the continuing misery around the South African mining industry.'Strange spectacle'
The QE phenomenon could well be a spent force already.
"The markets have been pricing in QE3 for most of this year. They have been built up since the beginning of the year on the hope of stimulus, either from the American central bank, or from Europe or from China," says James Shugg, senior economist at Westpac Institutional Bank.
"Because of that, we have seen the strange spectacle of markets rising when the economic numbers are weak - on the hope of some sort of intervention - and falling when the numbers are strong, on the fears there will be no intervention. The hopes of QE3 have built in the last few weeks and what we have seen in the last few days has been the tail end of a 'risk-on' rally."
The problem now is that the positive effects of QE3 policy will take a while to show through into the real economy.
In the meantime, investors may well start to take profits. Mr Shugg believes that because the Federal Reserve will be buying up mortgage backed securities, it will give some practical relief to the mortgage market and thus the American housing market.
There may also be some increased confidence among those investors who see their shares rising, which may feed into the real economy.
But for as long as any real recovery fails to develop, the markets seem unlikely to hold on to their gains.
On the plus side, few people think that we are going to see any serious correction to the markets.
"I think US stocks are probably undervalued at the moment, and I think we will go through a period of companies giving quite pessimistic guidance on their future earnings," says Stephen Pope, managing partner at Spotlight Ideas.
"So for some companies, there could be some surprise on the upside. But 2013 is, come what may, going to be a difficult year."
As Mr Shugg points out, there are plenty of risks which could still push everything over the edge - a hard landing for China, a collapse in confidence in the US because of the deficit, a failure of the euro, all of which mean the upside for the markets is very limited and will be a long time coming.