Stocks Rise as Bulls Look Beyond Volatility

After a volatile session on Thursday following the International Energy Agency's announcement that it would release strategic oil reserves in a bid to push oil prices lower, stocks started Friday strongly, before starting to drift by early afternoon.

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An agreement in Brussels by European heads of state on Greece’s new austerity measuresand a late pull-back on Wall Street saw a return of risk appetite in Asia and Europe.

How long that positive sentiment lasts depends on four major factors. The key factor is likely to be the health of the US economy following a sharp slowdown in data that prompted the Fed this week to cuts its guidance for 2011.

How the end of quantitative easing impacts the trading community will need to be watched closely as will the Chinese economy, which continues to power along despite attempts by the Chinese authorities to curb inflation. Finally a credible, long-term solution is needed to the Greek debt crisis.

While there are plenty of bears out there, we are beginning to hear a message of hope for the bulls from a number of leading analysts across the world.

In New York Larry Kantor, the head of research at Barclays Capital, believes markets have been roiled by elevated risks similar to those seen in 2010 but is confident things will improve soon.

“We believe that a near-term default will be avoided and that the recent economic slowdown is temporary," Kantor said.

Reversal in Risk Reduction

"If that proves to be correct, the recent slide in equity markets and generalized reduction in risk is likely to be reversed, and could even represent a short-term buying opportunity in equities and in some credit markets, particularly in the US, where a Q3 growth rebound seems most likelyand where policy will remain extremely supportive,” Kantor wrote in a research note.

This view is supported by Credit Suisse’s team in London who are now overweight stocks.

“We expect the global economy to re-accelerate in the next 2–3 months, helped by recovery in Japan. Political momentum seems in place for the further steps needed by mid-July to avoid Greek default,” said Giles Keating, the head of research at Credit Suisse in an interview with CNBC on Friday.

“We move to overweight, based on valuations and our expectation of constructive outcomes for the global economy and Greece,” Keating added.

This is not to say either man sees a stock rally as imminent.

"While the recent decline in market sentiment may have become overdone, the upside to any equity or credit market rally into the summer is likely to be limited,” said Kantor.

“Although we expect a near-term crisis to be averted, we do not believe that any of the problems currently generating risk and volatility in markets are going to be solved in the next few months,” he added.

“It is important to keep in mind that markets and economies are much less vulnerable to a sharp and sustained drop than they were before the financial crisis,” Kantor said.