By Rudi Filapek-Vandyck, editor of investment newsletter

FN Arena

past week was the second worst in history for global market sentiment
as measured by Credit Suisse, only beaten by the crash in October 1987.

Wednesday last week Credit Suisse’s Global Risk Appetite Index fell out
of the so-called Euphoria zone, a significant event since the index had
remained in the zone since the final quarter of 2005, with the
exception of one single day.

The longest period of global market
euphoria thus came to an abrupt end on Wednesday by sinking below 5.0
but as the index kept on falling it reached 3.8 on Tuesday, which, the
broker points out, is the index’s lowest level since October last year.

overall fall in investor sentiment is shown as one straight vertical
line from the highest index point in 20 years to land back at the
level of eight months ago – a scary sight, if anything. As said in the
opening paragraph, the index’s fall from 7.3 on May 11 to 5.2 on May 15
was the second biggest two-day fall in its history.

To add to the
significance of the event: the broker’s global risk appetite index lost
four whole points in the span of 11 days. If one comes to realise this
is from a high of 7.3 one doesn’t need to think any further to seek to
explain the magnitude and force of the recent sell-off: investors all
ran to the exit gates, it is that simple.

It hasn’t made Credit
Suisse’s global equity strategists happier than they were before the
event. Credit Suisse is among the worry beads who believe that core
inflation is definitely picking up, globally, and this does not spell
good news for share markets or commodities. It’s a cyclical thing. The
mildly positive news, as far as Credit Suisse sees it, is that global
economic growth is slowing, and this will somewhat cap the growth of

That’s the bad news. The good news, according to CS,
is that the underlying trend in global economics remains mildly
disinflationary, so inflation in the world as we are experiencing it
today should ultimately be kept in check because of greater supply (as
opposed to greater demand) and by global labour shortages.

debate about how severe wage pressure will become, especially on the
skilled end of the Western markets, is still raging. At Credit Suisse,
the strategists stick to a mildly optimistic view: wage pressures will
increase, but it won’t go through the roof. It is therefore that the
team expects to see a limited cyclical rise in core inflation only.
Credit Suisse therefore doesn’t believe there lies a drastic tightening
of central bank policy rates beyond the horizon.

Having said
that, the team doesn’t think the time is ripe to start aggressively
buying resources stocks either. Not yet. Overall investor appetite for
riskier assets is not expected to recover significantly in the short
term. Not until we have seen a deeper correction in industrial
commodity prices, the strategists argue, and until bond yields look to
be peaking. Only then will the overall climate for riskier assets
improve again.

Conclusion: global economic growth has to slow
down, to keep inflation in check. If this scenario unfolds a platform
will be created from which riskier assets, and global equities, will
benefit again later in the year and possibly into 2007.