Bank earnings embody abiding uncertainty

Safety, cash flow and caution are watchwords

London Compare the sentiment of investors now with that of a year ago and it could not be more different. Safety, cash flow and caution are the watchwords, as against the expectations for growth and recovery that greeted the start of 2011.

Yet in some respects the only difference between now and a year ago is the speed with which divergent market views have become apparent. In the first quarter of 2011 f inancial stocks rallied on hopes for the economy, while strong demand for government bonds in a February auction foretold the rush for safety that was to come.

This year there have been similar moves in just two weeks. On Wednesday there was record demand for US government ten-year notes. Judged by the amount of bidding for debt, demand was at the third-highest level on record.

Investors, it seems, are prepared to suffer the slow erosion of their capital by inflation, which is higher than the 1.9 per cent yield they will receive, for the guarantee that they will at least get their money back, $21 billion (Dh77 billion) of new paper which was snapped up by the market.

In the same two weeks the US banks have rallied hard, however. The question is what it means for the rest of the market. In part, it is just a catch-up from last year, when six of the worst-performing stocks in the S&P 500 were large banks. In what Convergex has dubbed the Lazarus Rally, those six have led the sector upwards.

The US bank rally also fol-