As the Financial Times nicely described it on Friday we now have a "pandemic of green shoots" and Friday was no different, with encouraging surveys of manufacturing and some services sectors in China and the US, a rise in US consumer confidence and an apparent slowing in the number of new jobless claims.
But three more US banks fell over, including one that acts as a wholesaler to 1400 smaller banks across the country.
Of course there were the ‘brown shoots’ that helped offset this rampant optimism: March factory orders down sharply for the 7th month in a row; non-defence orders edged up again, but not by as much as in February.
The number for Americans unemployed longer than a month hit another record, deflation and unemployment stalking Japan now to a worrying degree, a sharp fall in credit card use reported in the US by Mastercard (down 14% year on year) and another rise in money market interest rates, especially bonds.
Wall Street rose on the day and a week, markets in some parts of Europe and Asia are now at 2009 highs, oil hit a month high of $US53.20 a barrel, gold fell: it seems as though the good times are back.
The benchmark S&P 500 has risen 30% since touching a 12-year low on March 9, while the KBW Bank index has surged 64% since that low.
Bank sentiment will be tested with the release of the stress tests on Thursday night, our time.
Already there are reports that Bank of America needs tens of billions more; Citigroup another $US10 billion in fresh capital: all up one report said the 19 biggest banks need $US150 billion.
For the latest week, the Dow jumped 1.7% and the S&P 500 rose 1.3% while Nasdaq climbed 1.5%.
That was its eighth straight weekly advance and the longest weekly winning streak since December 1999.
But the remorseless rise in interest rates is the bearish signal market investors are ignoring.
The 10 year bond yield hit 3.15%, the highest it has been this year so far, and the second time in as many days it has reached a new year’s high.
Many commentators claim it is a sign that it’s the market telling us the worst of the recession is over.
It may be, but the huge funding campaign to feed the US government is hurting confidence.
But some say a sideways movement, or a small but nasty fall, would help shake the confidence of investors.
But even there, retail investors seem to be far more cautious than bigger players.
According to the latest figures, US stock mutual funds garnered six straight weeks of inflows starting the week of March 18, totaling $US15.9 billion, with an estimated 85% of that amount designated for American investing funds.
But US bond funds gobbled up more than double that sum: around $US39 billion, emphasising the still keen desire for safety and scepticism about the current rebound.
That money though has gone into a bond market at a time of falling prices and rising yields: losses in many cases, again emphasising the desire for safety over performance.
The financing of America’s huge deficit and other programs is going to continue to test bond market sentiment, and the wider markets in coming weeks, with the chance interest rates could spike higher.
The American Treasury plans to sell record $US71 billion of notes and bonds next week, to finance a widening budget deficit, bank bailouts and fiscal recovery packages.
Much of this funding will go to rolling over existing debt: just $US18 billion in new debt will be issued.
The 71 billion dollars will be part of the government’s total borrowing needs for the April-June quarter.
The government will have to borrow $US361 billion in the second quarter, a record amount for the April-June period, the Treasury estimated last week.
During the July-September quarter, the government will need to borrow $US515 billion dollars, and it borrowed $US481 billion dollars in the first quarter of this year.
With more corporates starting to borrow from the markets, further upward pressure on bond spreads and yields will appear (the so-called crowding out argument).
With all this in mind, the rebound in markets so far is a largely a trading call, there isn’t so far a change in the fundamentals.
Cheap credit and government generosity are at best palliatives that at some point will be withdrawn to allow financial markets to stand on their own and find a true equilibrium.
Fed chairman, Ben Bernanke is sure to be quizzed on his ‘exit’ strategy in winding back all this lending when he appears before the US Congress this week.
The financial system is not fixed, merely stabilised.
The results of the stress tests on the 19 biggest US bank will be a huge test from next Thursday.
Housing markets have not yet touched bottom. We will see more reminders of that this week.
Chrysler has been bailed out by direct government intervention (giving union pension funds control).
General Motors could very well follow.
China can’t save the world by itself, and the chance of an emerging markets crisis, given the withdrawal of foreign lending, especially in Europe, remains high.
Europe is weak, especially Germany and the UK; Japan is facing deflation and a painful slow slump.
More immediately, government bond yields are rising in the US and in Europe; so are corporate bond spreads.
The Financial Times this week warned "the best of the rally has already passed".
But like during the great credit moderation when money was cheap, many investors and bankers are turning a blind eye to reality and trying to make hay while the cash is again cheap.
Both won’t last. The hope is that having m
