NEW YORK (Reuters) - Just like the abrupt end of a “sugar rush”, financial markets are now coming down from this summer’s cheap-money high, according to influential investors.
Renewed risk aversion has swept through global stock, bond, foreign exchange and commodity markets in recent days as signs of persistent weakness among U.S. consumers has dimmed the prospects of economic recovery.
U.S. stocks have been hit particularly hard by this shaken confidence, suffering their worst rout in seven weeks on Monday as investors doubted share prices could sustain current levels after a rise of 50 percent since March.
“People are starting to understand that 2010 is going to be tough, that as yet we do not have a sustainable, large recovery on the cards for 2010,” Mohamed El-Erian, the chief executive of bond fund manager Pacific Investment Management Co, told Reuters Television.
“We are basically waiting for a re-pricing of risk assets to a more attractive level.”
U.S. government bonds, which benefit during times of worry in stock markets, posted their strongest performance since December last week, according to Bank of America Merrill Lynch Fixed Income Indexes.
“People are rotating into quality away from risk, a shift which should continue into the fourth quarter,” said Haag Sherman, co-founder and managing director of Salient Partners, a Houston based investment firm.
The enthusiasm that lifted stocks around the world was also reflected in the foreign exchange market in recent months, where investors dumped the low-yielding U.S. dollar and yen for currencies and assets that promised higher returns.
During this time, the euro in particular benefited whenever investors felt more bullish about the global economy.
However, the euro has shed 3.3 percent against the yen in the last week and a half and has also weakened a bit against the dollar during the same period.
CMC Markets analyst Ashraf Laidi said he expects pessimism to grow once investors return en mass from summer holidays.
“We’ve seen one of the fastest bear market rallies in recent history, and it’s been fed largely by a record-breaking wave of liquidity and, to a lesser extent, improved signs of economic stability,” Laidi said.
“The question becomes: Is the market betting on a recovery that is far from confirmed?”
In particular, PIMCO’s El-Erian and others have expressed concern over the distressed state of U.S. consumers, who drove the boom-and-bust economic expansion of the last decade.
Data last week showing retail sales fell in July highlighted these difficulties and helped spark stocks’ retreat.
Now heavily indebted and facing a rise in unemployment, consumers lack the financial strength to inspire a strong recovery from the worst U.S. recession in decades.
Even optimists have their concerns.
“I’m worried about the U.S. consumer,” Barton Biggs, managing partner at Traxis Partners in New York, told Reuters Television.
Biggs said he believes there will be a strong recovery, but cautioned on the uncertainties surrounding the U.S. economy.
“Have we bottomed? Yes. Are we on the way to a meaningful recovery? I think so, but we can’t be sure.”
Many see the recent stock market rally as a result of the Federal Reserve’s near-zero interest rate policy and its buying up of assets to inject liquidity into the financial system.
El-Erian has previously called the enthusiasm for equities a “sugar high” and said on Tuesday the recent retreat showed investors’ worries over the economy.
El-Erian said: “We’ve reduced the risk in our portfolios. We have found that in terms of the risk rally it had gone too far relative to fundamentals.”
Additional reporting by Dan Burns, Jennifer Ablan, John Parry, Steven C. Johnson, Richard Leong, Rodrigo Campos and Jennifer Rogers