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UK stock market commentary (March 06, 2013): Are we seeing "irrational exuberance" again?

Buying momentum in the US markets remains underpinned by confidence that central bank stimulus will remain ongoing for the foreseeable future which led the Dow Jones to record it highest level ever. The famous words of former Federal Reserve Chairman Alan Greenspan are reverberating through the markets when he said investors were suffering from “irrational exuberance” in the mid 1990s as the Dow hit new high after new high, but went on to complete the last major bull market in equities that ended in the bursting of the huge technology bubble.

So for many investors it’s a question of how much further can we go. Whilst many will believe that this “irrational exuberance” is upon us today, the majority are basking in the glory of easy money expecting equities to head higher and higher.

So as mentioned the Dow yesterday reached a record all time high of 14286 before closing for a triple digit gain up 125 points up to 14,253. The flow of easy money has provided much badly needed certainty for US companies and as a result they are on the whole reporting some solid corporate earnings. This combined with the fact that investors had very few choices as to where to put their wealth given the low interest rates for bank deposits or government bonds devalued currencies and a sluggish property market all supports the idea that equities could push even higher.

Interestingly, European markets have commenced the session stronger than we had anticipated earlier ahead of the open today. We had been calling for a little bit of profit taking with the FTSE 100 expected to fall a handful of points but it but it looks like the “irrational exuberance” that’s driving US indices higher is rubbing off on the London market as it is currently up some 15 points.

The services and manufacturing in the euro area showed a smaller than initially anticipated contraction to 47.9% against estimates of 47.3%. The report spurred some renewed buying in the euro versus the US dollar which finished 25 pips up at 1.3042. A rise in Italian bonds, under pressure lately, was also a supportive feature for the shared currency. At the time of writing there seems to be little in the way of “irrational exuberance” for the euro as EUR/USD is trading at 1.3050.

Gold closed hardly unchanged at $1574.9 yesterday and is still struggling to gain investor’s interest who have switched to riskier assets. The global economy is still seemingly improving as stocks rose to their highest level in 4 1/2 years with the Dow hitting a record high on the release of data showing growth in the services sector. The main supporting factor at the moment is the prospect that some central banks will continue to advocate loose monetary policy because they feel this growth is not sufficient. Policy meetings are to be held by the ECB and BOJ and investors are watching cautiously.

The feel good factor in the global markets once Dow moved to an all time record high spilled over into the energy complex dragging the WTI crude prices higher. It was a 63 cents rebound to $90.81 also supported by a slightly weaker greenback. However, growing concerns of a real estate bubble in China whose burst could have devastating effects might keep oil prices in check.