Markets may have stepped back from the brink in recent days but they still face the spectre of a weakening economic outlook, which suggests that investors should remain cautious, advises BCA Research.

“The panic phase of the credit crisis may have passed, but the poor economic outlook warns that the financial markets will remain strained for some time,” BCA says in a research note.

It notes that there are signs that money market conditions are improving, interbank lending spreads are declining, signaling that banks’ cash hoarding is gradually diminishing. “This helped trigger a rally in equities, with the S&P 500 bouncing nearly 7% on the week and emerging market stocks jumping 15%, albeit from extraordinarily oversold levels,” it reports.

“The euro-yen cross rate corroborated that risk appetite has slightly improved, bouncing from its low at the beginning of last week,” it adds.

“Technically, most risk assets look poised to extend their gains in the near term, as the panic that gripped the markets several weeks ago abates. Markets, however, will continue to be buffeted by lots of bad economic and corporate news, suggesting that rally attempts are unlikely to prove durable,” it cautions.

“We expect risky asset prices to climb further in the near run, but the challenging cyclical economic outlook argues for continued investor caution,” it concludes.

IE