Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls "imbalance- and bubble-building".

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to "sequence" the great unwinding.

And then there is Argentina, which is not alone in noticing that talk of unwinding tends to put investors on edge.  Its central bank governor wants the big countries to be careful, fearing a rapid reversal of stimulus policies could mean big outflows in emerging market countries such as, er, Argentina.

So a tricky balance, a super-sensitive investor audience, and plenty of domestic politics. Fore!

Last week was one of the worst for global equities in a long time. MSCI’s benchmark all-country index fell 4.3 percent, the most it has lost since the week ending March 8, just before this year’s stunning rally began. Emerging market stocks, meanwhile, dropped 5.6 percent in the week, the largest fall since mid- to late-February.

As if that was not enough, volatility soared. The VIX fear gauge leapt 37.8 percent in the week, nearly 30 percent alone on Friday. Cross-sectional volatility — volatility between stocks as opposed to just the index — is also rising as can be seen  (black line) in the graph to the right.

But might it all simply be a matter of timing? Credit Suisse estimates that 22 percent of mutual funds end their fiscal year at the end of October. So the big sell off could at least in part be due to managers ensuring their end of year profits look good.

(Graph: Scott Barber)

Investors smelling profits in commodities are using the sector as an early cycle play, alongside equities, because a lack of production capacity means higher prices sooner rather than later. 

Historically, prices of natural resources lag equities, which typically front run the economic cycle by between 18 to 24 months. The change is also partly due to the tumbling dollar, a major driver in recent weeks.

The natural resources sector is also one of the last to price in economic expansion. But not this time.

Global capacity utilisation rates in petroleum products and mining between 2002 and 2007 averaged more than 90 percent. Analysts estimate those levels fell to 80 percent — still very high — in July 2009.

In contrast, utilisation rates among manufacturing companies was estimated at around 65 percent last July from about 80 percent between 2002 and 2007. Equivalent numbers for the auto sector were 45 percent and 80 percent respectively.

The large output gap in manufacturing and the auto sector means production can ramp up easily without any bottlenecks when the global economy sees stronger growth, albeit from low levels.

Not so in commodities, where firms are running a tight ship.

Britain’s FTSE 100 seems to be almost impervious to any bad data that can be thrown at it. GDP data shocked the market showing the UK unexpectedly contracted in the third quarter.

Sterling tumbled more than a cent against the greenbackand gilts jumped while the FTSEurofirst 300 pan-European equity index trimmed gains considerably.

But Britain’s FTSE shrugged it off, hugging its 1 percent gains in the face of data which shows the UK economy is still ailing badly.

 It is the cosmopolitan nature of the FTSE which is keeping it buoyant. Miners and energy firms make up over 32 percent of the index, while miners banks, also very much global institutions make up a further 16 percent.

Howard Wheeldon on BGC Partners says:

“The FTSE is a function of globalalisation and trading conditions and growth elsewhere in the world have more of an impact than domestic growth. If the global recession is over and demand is picking up internationally, it’s all the more reason to close your eyes to
what’s going on in the tiny island that it happens to be registered in.”

It says a lot about the way investors are thinking at the moment that very good earnings from Goldman Sachs were greeted with a mini-stock selloff and a bounce for the dollar. But it is not that people are glum and selling even on good news — more a case of them being so ebullient that anything which is not outlandish is a disappointment.

The top-of-the-pile investment bank was supposed to report quarterly earnings of $4.24 a share.  Instead, it stormed in with $5.25 a share, a good 23 percent higher and an increase of 190 percent over the year earlier figure.

But on the wilder fringes of the market, speculation had been doing the rounds that the earnings-per-share figure would be around $6. It wasn’t, so Wall Street futures tanked, the dollar went positive and world stocks pared gains.

Remember, this was not because Goldman did not beat expectations. Neither was it because did not beat expectations by a lot. It was because they did not beat the so-called whisper number, which would have been a massive achievement.

JPMorgan may have raised the bar earlier this week when it came in with better results that forecast.

But does this not suggest that investors are now so positive about what is happening that their dreams are getting the better of them?

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

This month’s Reuters global asset allocation survey shows that investors have cut back on buying equities after an almost non-stop rally since March.

According to a survey of 49 leading investors in the United States, Britain, continental Europe and Japan, investors now hold an average of 54.9 percent of their portfolios in equities.

This is the lowest level since February and below the long-term average of 59.3 percent.

For more graphics click here and here.

Investor sentiment goes through various phases in an economic cycle -- from optimism, euphoria to panic and depression, back to hope and optimism.

James Thomson, investment manager of Rathbones global opportunities fund, discusses the current stage of investor morale.

Reuters has taken its monthly snapshot of the investment choices of leading fund management houses across the world. At the end of July, the picture painted was one of investors embracing risk and shutting down their safest holdings.

Equity holdings as a percentage of a typical balanced portfolio were at their highest since the end of August last year, just a couple of weeks before Lehman Brothers collapsed. Here is what has been happening to equity holdings this year: 

At the same time, cash holdings have been cut back drastically. They are now at a level last seen in May 2007.  Here’s what that looks like:

Bonds offers a more mixed picture, but the latest month still shows a retreat that would be typical of roaring risk appetite:

Now the big question. Does all this add up to the start of a meaningful, long-term bull market? Or is it just overly optimistic exuberance?

By Jason Benham

Glitzy Dubai's property market is in trouble, there's no doubt about that. Just take a look at the hundreds of motionless cranes, unfinished projects and the expats who are leaving in droves as they lose their jobs.

And prices and rents which soared during a six-year boom have crashed since late last year. According to one resident who recently moved in the City, it now costs 150,000 dirhams to rent a three-bedroom flat on the Palm, a man-made island off the coast of the emirate, around the same it would have cost to rent a one-bedroom appartment there a year ago.

It's not just the global downturn thats the concern for Dubai's once-booming property market, but also the lack of transparency and need for greater regulation. And that's what's going to keep the western investor from splashing the cash.

Investors looking at Dubai's real estate sector are a different breed. They are no longer looking to snap up properties in the hope of making a quick buck. They are more conservative with a longer term outlook.

"RERA (the Real Estate Regulatory Authority) has been trying to introduce regulation to minimise the impact of speculative investors," said Andrew White, head of Middle East operations at UK-based investor Kenmore property Group.

"But some have said this is like shutting the stable door after the horse has bolted because the downturn has more or less wiped these out anyway." So, a little too late perhaps ? And what about the recently announced planned merger of Emaar Properties, builder of the world's tallest tower, with
three other local property firms?

Well, so far no one really knows. Simply put, there has been little in the way of information about this.

"If you look at Emaar and the potential merger, there is little financial clarity on how this will proceed and that is going to worry investors," said Bobby Sarkar, analyst at Al Mal Capital. "The U.S. and European markets have high levels of clarity in terms of regulation, but that isn't the case here."
 
There is no doubt however that the government is trying to improve regulation and transparency. Several wins for the property market over the last year include the introduction of a monthly rental index and new laws for property maintenance, not to forget the continuing effort to crack down on corruption.

But there is a long way to go and more is needed for Dubai to come close to rivalling mature markets such as the UK and U.S. which offer the longer-term investor the transparency they crave.