How much longer will the rally last? All good things have to come to an end.

How much longer will the rally last?
At the end of each month, BBC World News business presenter Jamie Robertson takes a look at the world's major stock markets. This month he considers what will happen when the global rally comes to a halt.


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The price of copper has almost doubled in the past year
A world where everything is going up in price and inflation is close to zero should be a happy and contented place.

It is not quite turning out that way.

Investors cannot put the idea out of their minds that all good things have to come to an end.

It is just no one yet can figure out how - or how messy an end it is going to be.

Huge gains

First, the good news.

Had you invested in a spread of Dow stocks a year ago you would have seen a 24% gain - despite the virtual wipe-out in the spring. The Nasdaq has seen a 51% gain, the FTSE 29%.

Bonds, treasuries as well as corporate bonds, have all shown healthy returns - even though they traditionally head in the opposite direction to stocks, benefiting from low growth scenarios. Copper is up almost 100%.

Early this year, metals prices started to lose touch with fundamentals

Andrew Cole, analyst
It seems everything investors have touched has turned to gold - which, I might add, is up over 70% on the year.

And that's without even mentioning some of the super-performers: the miners Fresnillo and Kazakhmys have risen - wait for it - 597% and 516% respectively.

Now these numbers have a somewhat narrow relevance in that November last year marked the low point for many commodity stocks, while the bulk of the global markets hit bottom in March.

Nevertheless, the point is we are riding a bull market goaded on by an indiscriminate, possibly blind and certainly irrational exuberance.

Commodity boom

The exuberance comes from cheap money.

As long as the liquidity remains the market will not fail, but we all know that at some point monetary policy will start to tighten and the stimulus packages will run out.

Then as fundamentals start to come back into play, which of the markets will turn out to have been an illusion?

The date of this turn-around seems to be around the middle to end of next year.

A number of economists are pointing to June or July for a raising of interest rates in the euro-zone, while the US is likely to wait until the end of the year.

However, markets are very good at pre-empting these things and they may well stumble several months before the actual moves are made.

Commodity prices are particularly sensitive to the Chinese economy that really lifted them out of their trough at the end of 2008, and the weakness of the dollar.

Investors moved money into commodities as a hedge against the dollar and a bet on recovery aided, if not led by China. But, again, it is the weight of money that has caused the rises.

So it is no accident that mining companies dominate the list of best performers on the FTSE 100 over the last year.

'Very shaky'

But Andrew Cole, metals analyst at Metal Bulletin, said: "Early this year, metals prices started to lose touch with fundamentals, which are still pretty poor.

"Outside of China, demand has still not picked up. There is a lot of risk and demand is very shaky. And there is no sign that stockpiles are coming down either.


Those who invested a year ago have had a good run

"But the truth is that investors are looking for places to put cash, and metals still look like a good bet," he added.

The trigger point for a commodity sell-off could be a strengthening of the dollar (or a corresponding weakening of the euro), especially if it happens in conjunction with a slowing of the Chinese stimulus package and a tightening of monetary policy, all of which are possible at varying points over the next 12 months.

The bond market is perhaps the most curious bull market of all, since it seems to be built on such a colossal supply of debt.

While the Dubai crisis rocked the sovereign debt markets - there was no real fear of a sovereign default as Dubai World is a state-owned company, not the state itself.

The real worries are closer to home in Greece, Ireland and Hungary.

UK concerns

Deutsche Bank believes Greece's public debt-to-GDP ratio could soon reach 135%. Meanwhile in the UK if the government doesn't get to grips with its debt in the next 12 months, the bull market in treasuries there may also come to an abrupt halt.

But, and here's the twist, if it does get to grips with it, such self-discipline could mean curtains for the equity bull market.

Howard Wheeldon, senior Strategist at BGC Partners, believes the US has a diverse and dynamic enough economy to continue its recovery.

But he paints a gloomy picture for the UK: "What will happen then to equities when they start slashing jobs in the public sector, when they start putting up taxes, ending the subsidies to things like car buying, and start doing all the things they have to do to bring the debt under control?

"Many of the equities in the UK have a cushion in that they have a great deal of exposure to the international economy, but the effect on the UK economy of all that austerity is going to be profound."

http://news.bbc.co.uk/2/hi/business/8393574.stm