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Investors query rally as growth remains fragile

World shares dipped yesterday and oil prices steadied due to investors’ caution on whether the strength of the global economic recovery justified the sharp rally so far this year.

US stock index futures pointed to a similarly flat session on Wall Street, with traders reluctant to extend a rally that has taken the benchmark Standard and Poor’s 500 index to its highest level in over five years.

The wariness is in anticipation of a series of significant US economic events this week, including the initial estimate of fourth quarter gross domestic product, the Federal Reserve’s first policy meeting of the year and January payrolls data.

“Markets don’t go up in a straight line,” Garry Evans, the global head of equity strategy at HSBC, said.

“I think that people are realising there could still be problems out there.”

Adding to the potential pitfalls ahead were signs from Washington that the $1.2 trillion (R10.7 trillion) in automatic spending cuts due to take effect by March 1 could go ahead, threatening to damage confidence in the giant US economy.

MSCI’s benchmark world share index was down 0.1 percent yesterday, though it has gained almost 4.5 percent this month on signs of economic recovery in the US, stabilisation in the euro zone and accelerating growth in China.

European stocks were unchanged, with the broad FTSEurofirst 300 index of top company shares hovering just under a two-year high.

The market’s softer tone also followed a weaker session in Asia, where falls in technology companies saw the MSCI’s broadest index of Asia-Pacific shares outside Japan drop by 0.4 percent.

Data from the European Central Bank gave another reminder that the recent surge in financial markets was not being matched in the real economy.

Lending by banks to euro zone companies, consumers and home buyers contracted in December for the eighth month running as recessions across much of the region sapped the appetite to borrow and banks’ willingness to lend.

“As of the end of 2012, there was no sign of improvement in credit flows,” said Marie Diron, an economist who works on Ernst & Young’s euro zone forecasts.

“However, we think that during 2013, with a much more secure economic environment than last year, banks will start easing credit standards somewhat, and companies will be more willing to borrow to invest in the euro zone.”

Data showing inflows to global equity funds have slowed in the past week, and comments from several major investment banks, noting signs that the market may be reaching a natural top, added to the caution.

Among the warning signs was Citigroup’s US Economic Surprise Indicator, which tracks how new data compares with expectations. This has turned negative, while the survey by the American Association of Individual Investors remains in the top 5 percent of its observed readings.

JPMorgan Chase said that historical data for each of these readings showed they were normally followed by lacklustre equity returns. – Reuters

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