Stocks confound global growth bears Perhaps central banks should set up a helpline for bears. The International Monetary Fund this week issued distinctly gloomier forecasts for the global economy, while Standard & Poors downgraded Spain's credit rating to near-junk territory. Yet bond and equity markets barely quivered. After a strong summer rally, the FTSE Eurofirst 300 ended the week near the year-highs set last month. Spanish 10-year bond yields stayed firmly below 6 per cent. German Bund and US treasury yields remained near historic lows - as did corporate bond yields. "For fundamental bears like us, this phase seems frustrating and counter- intuitive," complained Hans Lorenzen, a credit strategist at Citigroup, in a note. His bafflement highlights the topsy-turvy effects of crisis-combating actions taken over the summer by the US Federal Reserve and European Central Bank that have driven a wedge between asset prices and economic fundamentals. The IMF this week revised down its forecast for global economic growth in 2013 from 3.9 per cent to 3.6 per cent. Even that assumed the US took steps to avoid its looming "fiscal cliff" of tax rises and spending cuts, and a turnround in the eurozone's fortunes. Deep recessions were expected by the Washington-based organisation in Italy and Spain this year and next. Worries about Spain's economic and fiscal performance, as well as "the lack of a clear direction in eurozone policy," lay behind Standard & Poor's two-notch credit downgrade to triple B minus from triple B plus. UK economic forecasts were also downgraded sharply by the IMF. By convention is that equity prices and bond yields, which move inversely to prices, fall together as harder economic times near. But such relationships have broken down during five years of global crises. "You had a rally on the stock market this summer while all analysts were revising down their earnings forecasts," says Stephane Deo, head of asset allocation at UBS. The explanation is investors" faith in the ECB and Fed. In July, Mario Draghi, ECB president, appeared to remove the "tail-risk" of a eurozone break-up by pledging to do whatever it takes to preserve the eurozone's integrity. "It is a risk premium rally - that is all it is," says Mr Deo. In government bond markets, investors have been reluctant to bet against ECB intervention - no matter how long Spain dithers over the terms set by Mr Draghi for ECB action and eurozone leaders bicker over rescue plans for Greece or strengthening the region's banks. Meanwhile, the Fed's QE3 or quantitative easing programme has encouraged global asset allocation shifts by depressing short-term interest rates. "Limbo stick level yields resulting from the Fed's monetary policy are prodding investors into riskier assets, creating enormous demand for investment grade and high-yield bonds," says Jack Ablin, chief investment officer at Harris Private Bank. "The Fed is reducing the available supply of Treasuries and mortgages to the point where natural capital allocation is not occurring," adds John Briggs, a strategist at RBS Securities. Can it all last? No one expects an early correction in bond markets while Fed action continues. Meanwhile, at least US equity prices are supported by signs of underlying economic strength, with the US housing and jobs markets slowly improving. The S&P 500 sits on a gain of almost 15 per cent this year. Alan Ruskin, a strategist at Deutsche Bank in New York, argues that even if this earnings season is being treated with caution, a "relief rally" could follow November's presidential election. "History suggests that when you remove the uncertainty, you typically see a rally in the S&P. So I think you are going to get to the "risk on" stage again." Deutsche Bank is upbeat on European equities. "It has never been a good idea to take your cue from the IMF in timing the market," says Gareth Evans, an equity strategist in London. What is not priced, and what the bears are missing, is the potential for a turn in European growth. But levels of scepticism remain high. Central banks said they would do whatever it takes and we saw risk assets enjoy a very good third quarter. The question now is: what can you promise after that?" asks Jay Mueller, a portfolio manager at Wells Fargo. For risk assets to rally further, we need to see fundamentals improve. David Lloyd, head of institutional portfolio management at M&G, says: "Not so long ago, the idea that [UK] gilts, [German] Bunds and US Treasuries could trade at close to the same yields as Japanese bonds would have been considered ludicrous . . . But we only need a slight reversal to more normal interest rates and a lot of people will lose a bucket of money. As for the bears, Citigroup's Mr Lorenzen sees markets as having a "bit of a Wile E Coyote moment" - like the cartoon character who keeps on running even after he has jumped off the edge of a cliff. I don't want the world to come crashing down . . . I think Wile may run a bit further, but I'm sceptical that we can avoid further turbulence longer term. Additional reporting by Robin Wigglesworth in London