The pithiest answer to the question ‘Why is the market up?’ is often used to hide the fact that the person being asked does not really understand the price action at all. That there are more buyers than sellers is frequently all one needs to know. At the beginning of the year it was uncertain if the support to the financial system from cheap money, abundant central bank liquidity and fiscal easing would overcome the deflationary forces that started with credit losses in banks and accelerated with near-total collapse of the system last autumn. Sentiment turned, after a chilly January and February, on hopes that financial Armageddon had been averted.
In late July, credit and equity markets are more than firm. There are more buyers than sellers as indicated by the bellwether indicators. The S&P500 – up 44% since the March low – is fast approaching 1,000; some analysts are adding as much as another 100 points if it breaks through the big figure by the year-end. In the European credit market the big figure – this time 100 – has already been breached. The iTraxx Main’s fall to below 100 basis points signals just how well things are going – quite some way from the 200 handle quoted for the index in the early days of March.