The return of the 'Goldilocks' scenario to the stock markets

Believing a recovery is underway, many investors have rediscovered their appetite for risk, sending stock markets higher.

"Exuberance is the new cool", says Ralph Atkins in the Financial Times. The FTSE 100 has had its best January since 1989. The Dow Jones has eclipsed 14,000 for the first time since before the crisis. Clearly, says an RBS note, "a sizeable proportion of the market is willing to entertain the idea that the glass is not only half-full, but might be filling up".

But as we pointed out last week, while the global economy is looking better, it's too early to assume the recovery is sustainable. And there is ample scope for fresh crises. However, while the fundamentals don't justify the strong rally, there is plenty of liquidity to boost stocks. Risky assets always like low interest rates and money printing as these spur hopes of an economic recovery and some of the easy money finds its way into markets.

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