Markets are getting very close to being irrationally exuberant. Although there are some positive indicators, like the narrowing of credit spreads, and some stock market rebound from the March 2009 lows maybe justified by potential green shoots of economic recovery, other indicators paint a much bleaker picture. The rise in oil prices, and the significant rebound in banking stocks may prove in hindsight to be overly optimistic (Breakingviews)
The stock market’s latest “dead cat bounce” may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects. Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low. Third, financial shocks will be worse than expected (Nouriel Roubini)
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