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Signs that the US economic recovery is gathering pace, and receding fears over a Greek sovereign default have propelled the main US stock market index to near its highest level since before the implosion of Lehman Brothers triggered a global market meltdown in 2008.
The S&P 500 index has now gained more than 8 per cent this year and was up 1 per cent on the week, just shy of the post-crisis high in April last year. Crossing that mark would have meant all the losses since June 2008 had been clawed back.
The Dow Jones Industrial Average hit a four-year high on Friday, while the technology-dominated Nasdaq index this week hit its highest level in more than a decade. Battered European indices also rallied.
“Last year there were fears that the developed world was melting down, and emerging economies were heading for a hard landing,” said Philip Poole, global head of strategy at HSBC Asset Management. “Even though those fears were overdone, the strength of this year’s rally has been surprising.”
The market recovery has been driven by improving economic data in the US, and the European Central Bank’s injection of almost €500bn of cheap three-year loans to the continent’s banks, easing stresses in the eurozone’s financial system.
US jobless claims have fallen to near a four-year low and the beleaguered housing market has also shown signs of stabilising. The ECB will disburse another dose of bank loans this month, which may fuel the rally further.
The FTSE Eurofirst index of the continent’s largest listed companies and the UK’s FTSE 100 have rallied to their highest level since July. Eurozone government borrowing costs have also fallen sharply this year.
Underlining the recent improvement in sentiment, Fitch Ratings upgraded Iceland – one of the early casualties of the financial crisis – back to investment grade on Friday.
However, European officials said there were outstanding issues to be decided ahead of a meeting in Brussels on Monday of eurozone finance ministers to agree on a new €130bn bail-out of Greece. The “euro working group” – senior finance ministry officials from all 17 eurozone countries – are due to thrash out the remaining items during a conference call on Sunday.
Among the issues that still need to be resolved is how to get Greece’s debt burden to 120 per cent of economic output by 2020, the central goal of the new bail-out.
A debt analysis by international lenders has found the current programme will only get to about 128 per cent. Jean-Claude Juncker, the Luxembourg prime minister who will chair Monday’s gathering, said ministers were still struggling with how to bring the number lower.
“We are far away from that objective,” Mr Juncker said. “All the discussions I will have ... until Sunday night will try to move the figure nearer to the target.”
Mr Poole pointed out that time was running out for Europe to strike an agreement on Greece’s debt restructuring, given a large bond repayment due in March.
“This brinkmanship could still lead to a formal default,” he warned. “It’s an uncertainty we just don’t need.”
Moreover, the rally has been marked by low volumes and lacklustre flows into mutual funds.
The Dow Jones Transportation Average is down 1.1 per cent so far this month, suggesting that rising oil prices are weighing on the sector and may drag on the US economy.
“It doesn’t take much to move a market on low volumes and this shows that people are only dipping their toes into the market,” said James Sarni, senior portfolio manager at Payden & Rygel. “It’s a sign that there is a lack of widespread conviction about the equity market.”
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