By Jeremy Gaunt, European Investment Correspondent
LONDON, Oct 23 (Reuters) - Equity and bond funds continue to rake in the cash, global stocks are around 12 month highs and U.S. companies are wantonly beating earnings expectations as volatility sinks.
The 2009 equity market rally remains in full swing, yet heading into next week there are some signs that investors may be becoming more jittery about taking on risk than they have been lately, or at least keener to book profits.
What passes these days for a sell-off in relatively risky emerging markets hit this week, when the sector benchmark index has fallen for three days but looked to be bouncing back on Friday.
Meanwhile, the dollar, which has lately been hammered by growing risk appetite among investors, also had a few up days -- including rising on some occasions when equities were also up, a breaking of recent inverse correlations.
None of this waters down the fact that global equities as measured by MSCI rose to new 12 month highs some 75 percent above their March low. Or that the dollar is likely to close with three consecutive weeks of losses.
But it does suggest that the way up from here for riskier assets may be bumpier.
"While it might not have felt like it and it won't be music to most people's ears, a lot of the easy money has been made," said Tristan Hanson, head of strategy at South African-owned investor Ashburton.
"You have moved from very depressed valuations to normal levels ... Shorter-term one doesn't want to have too much risk."
While no one is calling what has happened since March a bubble, there is concern that the rally has been so fast and furious it needs a hiatus.
Indeed, this week's gyrations in emerging market stocks were prompted in part by Brazil putting a two percent tax on net foreign purchases of local equities and bonds.
It was an attempt to stem the flow of speculative "hot money" into its domestic markets.
ALL WELL?
The counter argument for risk assets is that earnings are surprising on the upside and the economic data is generally positive.
The latest Thomson Reuters research into the U.S. earnings season, for example, shows that with a third of the S&P 500 index having reported, 78 percent have beaten expectations.
The figure is 90 percent for technology stocks and even for financials it is 59 percent.
That said, it only took one Wall Street analyst sell recommendation this week -- on a bank -- to tip the whole market downwards for a day.
Economic data has been coming in positively enough to support risk assets -- Britain's poor gross domestic product (GDP) report on Friday notwithstanding -- but very few economists expect it to become robust.
ING Investment Management said this week, for example, that it now expected subpar growth in Europe and the United States next year, even though it forecast above potential growth for the rest of this year.
It suggested, however, that equity markets are only partially being driven by economic factors and that a lot of what has been going on is based on investors moving out of low-yielding cash into riskier, but higher-yielding assets.
If so, there is is plenty of fuel around to keep the fire going. Numbers from fund tracker EPFR Global suggest that the cash unwinding of the past two years is at most only two thirds through. Similarly, wealth managers report that many of their clients continue to hoard cash.
But they may be looking for an equity market retreat.
"Clients all want to know if the recovery has been too fast and gone too far, because they are all hoping it will snap back 10 percent then they can buy in," said Burkhard Varnholt, chief investment officer of Bank Sarasin.
GROWTH HOPES
With all this in mind, the coming week is likely to be dominated by events that can overturn the short-term trend toward profit taking.
On the economic front, U.S. third quarter GDP is likely to be the main factor.
It is expected to have risen at an annualised rate of 3.2 percent, but economists are then looking at a tailing off in the fourth quarter and into 2010.
The earnings focus, meanwhile, is likely to shift more towards Europe, where big companies such as Deutsche Bank and France Telecom are due to report.
European earnings surprises have been more muted that U.S. ones so far, albeit with only about 5 percent of the STOXX 600 index having reported. (Additional reporting by Claire Milhench; Editing by Ruth Pitchford)