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Froth, but no bubbles

The word of the moment is ‘frothy’. US equities continue to run. Some markets, particularly smaller ones like agricultural commodities and shipping rates, have seen parabolic rises in recent months. Questions are being asked.

For the most part, I don’t think markets are behaving in a way which suggests an excessive degree of confidence.

Admittedly, gains have been large. But rises have been consistent with the very strong policy response to the current crisis, and in line with the improvement in the economic data we've seen in the previous six months.

And the fact the steepest rises are happening in relatively esoteric markets suggests we're not seeing the final stages in some enormous blow-off top. It shows there's something more fundamental going on.


Fundamental indicators suggest the global economy is continuing to heal, which is consistent with ongoing global data surprises. Data continues to come in ahead of expectations.

Additionally, the only central bank really starting to ease back on liquidity is the People's Bank of China. Every other major economy is continuing with stimulus. I don't think what we're seeing is a bubble about to collapse under its own weight.

So what lies ahead? Parabolic rises don't last forever. The gains will end and some of them probably quite abruptly. But as there are fundamental drivers improving global economic health, I suspect other markets will quickly fill that that gap. Don't be surprised if we get a rotation.

Finally, it's going to be very hard to find bad macro data in the short term. If markets were falling sharply, you'd be really surprised if the macro data didn't fall into a hole.

The fact they're rising sharply means the global growth pulse, relative to expectations, is likely going to remain pretty solid.

Richard Yetsenga is Chief Economist at ANZ

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