Getting Indigestion With High Yielders. By Nicholas Hastings

Have global investors bitten off more than they can chew?

Their appetite for riskier asset markets rose at the start of this week - fueled not only by stronger-than-expected economic data but also by a positive interpretation of weekend comments coming out of the Jackson Hole symposium hosted by the Kansas City Fed.

The bottom line is that investors want to believe in the global recovery and are buying back into high yielders.

However, there is growing evidence that their confidence in the recovery is misguided. Not only is the strong economic data likely to prove unsustainable but official warnings are being ignored.

Moderating home prices in the U.S., the threat of more U.S. bank failures, slow euro-zone credit growth and lower corporate profits have all been flagged as developments that will ensure that third-quarter growth fails to match the healthy bounce seen in the second quarter and that the risk-friendly mood comes under threat.

Forecasts for economic data due later this week are fairly positive.

Key figures such as the latest Conference Board survey of consumer confidence later Tuesday and the latest Ifo survey from Germany are expected to improve.

Nonetheless, the risks are on the downside.

Take the sharp rise in U.S. existing home sales last Friday that helped to lift hopes that the U.S. consumer will soon be back on his feet. Few analysts expect this increase to herald a serious recovery in the housing market. On the contrary, they warn that sky-high foreclosures will continue to overshadow the market.

"No one should assume that stabilization will necessarily be followed by a sharp rebound," warned the strategy team at The Royal Bank of Scotland.

Bank failures, and the economic risks they entail, also remain an issue in the U.S., with another four U.S. banks collapsing last weekend.

With credit loss provisions likely to rise in a climate of growing unemployment, these risks will only get worse.

In the euro zone, meanwhile, slow credit growth is still a problem. The lack of credit not only poses a threat to corporate balance sheets but ensures that the region's financial institutions remain at risk.

These concerns were certainly expressed in Jackson Hole. Not only did Fed Chairman Ben Bernanke warn that this would be a very extended recovery but his counterpart at the European Central Bank, Jean-Claude Trichet, took an even more dovish view, warning of a bumpy economic road ahead.

However, investors have paid little heed.

Instead of using these remarks to downgrade their expectations for a rebound, they have taken them as evidence that interest rates will remain lower for longer - providing an excuse to buy into equity markets.

So if data later this week don't live up to expectations, they could well start to suffer from indigestion as their appetite for risk falls back again.

There were already signs of this early Tuesday with a decline in equity prices taking its toll on currencies.

With the Shanghai Composite Index losing 5% and the Nikkei 0.8%, the yen was generally higher as investors moved out of high yielders.




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By 0645 GMT, the dollar was down at Y94.02 from Y94.52 late Monday in New York, according to EBS.

The euro was down at Y134.46 from Y135.15 but ticked up marginally to $1.4303 from $1.4299.