Investment - Articles - Nick Gartside: A game of chicken

 Will it rally....will it stall....? What next for risk assets? Undoubtedly the performance of risk assets over the course of the year has caught many by surprise. In retrospect investors were over focused on concerns about Eurozone institutional fragility, government balance sheets and under focussed on the creative policy response of central banks that has effectively underwritten banks as well as unleashing huge amounts of liquidity.

 Liquidity has translated into significant cash balances desperate for a home with both yield and the prospect of some return. As this money has been allocated, positions have been diluted, fuelling more buying and in turn creating large numbers of marginal buyers. Buyers who have been further reassured by the positive turn that economic data has taken. Our proprietary leading indicators now suggest growth is likely to be above consensus estimates in the major economies.

 In the short run the facts have changed, but what about the prices and valuations? In some areas, notably G10 FX valuations do look stretched, but in parts of the bonds market such as corporate, high yield and selected emerging market debt valuations look more reasonable and in many cases have not reached levels seen in 2011.

 Over the next few weeks noise will intensify around any potential Greek deal and this could be a catalyst either way for risk assets, but ultimately it is difficult to fight the momentum and risk assets should be supported at least until the next ECB refinancing operation at the close of the month.