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Earnings relief and US housing data fuel gains The Financial Times July 09

US and European equities reached their highest levels of 2009 this week as relief that the majority of corporate earnings reports had exceeded expectations helped maintain recent upward momentum.

Tentative signs of stabilisation in the US housing and labour markets and positive economic reports elsewhere added to the bullish mood surrounding risk assets, along with fading concerns about the possibility of systemic failure as US corporate lender CIT Group managed - for now at least - to avoid bankruptcy.

However, many analysts began to call into question the quality of the corporate results that have underpinned the stunning equity rally of the past fortnight.

David Rosenberg, chief economist and strategist at Gluskin Sheff, said: "Earnings may be beating low-balled estimates for the majority of S&P 500 companies, but there is no questioning the fact that we are also seeing a sustained decline in revenues."

"What we are still witnessing is a trading opportunity rather than a fundamental shift in the outlook. We must take into account what the risks are going to be once the buying momentum is lost."

Stephen Lewis, chief economist at Monument Securities, noted that it was only a fortnight ago that the consensus in the market had been that the "green shoots" of economic recovery were shrivelling.

"Market participants have been reluctant to acknowledge that the corporate results they are now celebrating relate to the weeks when the 'green shoots' were sprouting," he said.

"This could mean that, even if the earnings figures are reflecting, to some small extent, a genuine underlying improvement in economic conditions, the factors that earlier this month led investors to reassess the plausibility of the "green shoots" scenario should also have led them to doubt the sustainability of any upswing in corporate earnings."

But for most of last week, there were few such concerns as leading equity indices racked up impressive statistics. The Dow Jones Industrial Average climbed back above 9,000 for the first time since January, the Nasdaq Composite index enjoyed its longest run of gains since 1992 and the FTSE 100 in London had it best winning streak since the end of 2003 as it rose for 10 sessions in a row.

For the week, the S&P 500 rose 4.1 per cent over the week, taking its rise over the previous fortnight to more than 11 per cent. The FTSE Eurofirst 300 ended a nine-session run of gains yesterday but still climbed 4.1 per cent over the five-day period, while the Nikkei 225 Average added 5.8 per cent. Emerging market equities were poised for their highest finish since last September.

Meanwhile, the Vix index of US equity volatility - frequently referred to as Wall Street's "fear gauge" - dipped below 24, its lowest level since before the collapse of Lehman Brothers last September.

Further evidence of the improvement in financial conditions came from a steep tightening in credit spreads , which saw the investment-grade Markit iTraxx Europe index narrow below 100 basis points, again to pre-Lehman levels.

The better risk environment continued to be reflected on the currency markets by falling demand for the perceived safety of the dollar and the yen.

Even sterling gained ground against the US dollar, in spite of the release of disappointing UK second-quarter growth figures yesterday.

Commodities advanced in line with equity markets, with oil climbing nearly 6 per cent to trade above $67 a barrel, copper reaching a fresh 2009 high above $5,500 a tonne and agricultural prices also enjoying big gains. Gold moved above $950 an ounce as it gained 1.7 per cent.

The biggest moves in government bond markets last week came in response to speculation about US and UK central bank exit strategies from their accommodative monetary policies.

Ben Bernanke, the chairman of the Federal Reserve, sought to allay concerns about the US central bank's ability to tighten policy, although he stressed that the fragility of the economy meant any move was still some way away.

By contrast, the Bank of England failed to offer such assurances as the minutes of its last monetary policy committee meeting suggested it believed the economy had greater near-term momentum than it had previously thought.

"We do not think that policy tightening by the BoE is remotely imminent; but the MPC appears twitchy, suggesting that the UK may be relatively early in exiting the realm of unconventional policy," said Simon Hayes, economist at Barclays Capital.

US Treasuries managed to stabilise following the previous week's sharp decline, with the yield on the 10-year bond rising just 2bp to 3.67 per cent.

The 10-year UK gilt yield, however, jumped 15bp to 3.96 per cent, while that on the 10-year German Bund rose 8bp to 3.48 per cent.