Tags: Nomura | rally | world MSCI

Nomura: Markets Have Been Too Negative, Rally on the Way

Monday, 06 August 2012 02:43 PM

The European debt crisis poses a very real threat to the global economy, but not to the extent that markets have fretted about it in recent months, analysts at Japanese financial institution Nomura write.

So get ready for a rally if the world doesn't suddenly fall into a recession, especially if central banks worldwide intervene with monetary easing tools that weaken paper currencies to spur recovery.

Stock prices rise when central banks act.

“Worldwide market volatility in May essentially ‘pre-priced’ a high likelihood of an imminent synchronized global recession, presumably stemming from disorderly deterioration in the euro area,” Nomura analysts wrote in a report, according to CNBC.

“Yet with every week the global catastrophe fails to materialize.”

The Federal Reserve has said it cannot rule out a third round of quantitative easing, under which the U.S. central bank buys bonds held by banks, pumping the economy full of liquidity in the process to encourage investing and hiring.

The European Central Bank (ECB) has said it will consider using a similar tool, while the Bank of Japan and the Bank of England could loosen monetary policy as well.

The MSCI World Index, which tracks over 6,000 stocks in 24 developed markets, could rally 19 percent from current levels by the end of the year, Nomura analysts added.

Hopes European policymakers will firewall and extinguish the debt crisis could really send markets gaining, especially if the ECB acts.

European paymaster Germany has been reluctant to give its blessing to sovereign bond purchases on the part of the ECB on grounds that debt-ridden countries must take tough-but-necessary fiscal reforms to work themselves out of their downturns.

However, opposition may be thawing.

"The Governing Council ... may undertake outright open-market operations of a size adequate to reach its objective," ECB President Mario Draghi said recently, according to Reuters.

Action from the ECB would spark a rally.

"If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets," said Christian Schulz, senior economist of Berenberg bank, a German financial institution, according to the AFP newswire.

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Monday, 06 August 2012 02:43 PM
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