A Wafer-Thin Meal For Risk Appetite

Once again, investors are shifting into riskier trades in Asian markets Wednesday, more on a lack of bad news than anything concrete. It could prove a temporary reprieve.

To be sure, there's nothing much on the global slate before U.S. retail sales data come out Friday. Still, risk aversion is lingering, like the aftermath of a bad headache, and is likely to resurface as the Federal Reserve's Tuesday policy meeting draws closer. Global stock markets have tended to fall when negative news comes out, then rise again the next day - simply because nothing "new" has happened. These are days when not much data come out, or when the housing sector behaves itself, or when policymakers steer clear of the big issues. Last night the Dow Jones Industrial Average had its first triple-digit gain of the month, rising 180.54 points, or 1.4%, to 13308.39, as 29 of its 30 members rose. There wasn't anything significant that happened in New York. Rather, it was the fact that nothing happened, especially as Federal Reserve Chairman Ben Bernanke avoided touching in his Berlin speech on whether - or how much - the Fed may cut rates next week. The recovery in U.S. stocks has spurred the usual renewal of some risk appetite, which is good for stocks in Asia, and for high-yielding currencies like the Australian and New Zealand dollars amid demand for carry trades. It is also bad for the "safe-haven" yen, with the U.S. dollar around Y114.26 in Asia, up from Y114.00 late in the New York session, and the euro gaining to Y158.11 from Y156.67. That still leaves things looking a bit shaky, however. Not in the sense that the U.S. economy is barging into a recession, and not in the sense that central banks around the world aren't going to keep things under control. From a medium-to-longer-term perspective, markets may be a bit carried away in predicting 100 basis points or more in Fed rate cuts before the end of the year, and in predicting a global economic slowdown. This column has previously pointed out the points of resilience, especially in Asia. But in the short-term - i.e. the next week - there is much room for market volatility, as the Fed meeting draws nearer. One could argue that the data and event vacuum of the next few days is a perfect environment for risk to take on a more solid footing. As the saying goes, "no" news is better than "bad" news. But as markets start to jostle for position in terms of what exactly the Fed will do (and just as importantly, what it will say), bouts of risk appetite may quickly be followed by risk aversion.