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What the stockmarket rebound really means

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Investors heavily exposed to US stocks just had their best week of the year. But the rebound also raised several questions related to market behaviour, policy and economics. How they are answered will prove consequential not only for market prospects but for the global economy. And, notwithstanding the lack of decisive answers at this stage, there are already implications for investment portfolios.

The global market rebound last week may not be as simple as it appears.Credit:AP

Last week's strong US equity performance stood in stark contrast to two other market developments.

First, yields on government bonds fell across the board, driving the benchmark 10-year to below 2.10 per cent and that on its German counterpart to minus 26 basis points. The moves are good news for stock investors if they foresee more dovish central bank policies -- but less so if they signal a lower global growth picture.

There is also uncertainty as to the repercussions of such low interest rates. Will they fuel "Japanification" in Europe and, to a lesser extent, the US as households hold back on consumption and worry about shrinking access to long-term financial protection products, while companies hold back on investing? And how deep will the resulting damage be to the longer-term functioning of financial markets?

Another issue is the flood of investor money going into bond funds at such low interest rates. Is it a sign of appropriate, forward-looking risk-management or, instead, a backward-looking, pro-cyclical reaction that increases the vulnerability of investors to future losses?

The second big market anomaly relates to the performance of the higher risk asset........

© The Age