This note looks at the rally in share markets over the past month and whether it is sustainable. The key points are as follows:

– Shares have had strong broad based gains over the last month driven by better than expected economic data and policy stimulus going into overdrive.

– After 20% or so gains in share markets over four weeks, shares were due for a correction and this may now be occurring with shares having fallen back over the last two days.

– But while it’s too early to say for sure that the share bear market is over and the road is expected to remain rough, there are some positive signs, including evidence economic stimulus is gaining traction, which may be consistent with a cyclical improvement in shares getting underway.

– To get more confident that we have entered a new cyclical upswing in shares we would look for any pullbacks in shares to bottom above their March lows, credit spreads to narrow further, the decline in US house prices to slow, US efforts to remove toxic debts from banks to be successful and business and consumer confidence to trend higher.

– In terms of Australian data released today, the decent gains in housing finance and consumer sentiment highlight that fiscal and monetary stimulus is working. That said rising unemployment is likely to put both consumer confidence and housing finance under some pressure in the months ahead. As a result there is no change in our view that the RBA will cut the cash rate down to around 2% over the next six months.

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