By Jeremy Gaunt, European Investment Correspondent
LONDON, Feb 6 (Reuters) - German industrial output slumps to its worst level since unification. U.S. monthly job losses are the biggest for 34 years. Equity markets rally.
Something is going on in financial markets that suggests investors may believe that a bottom is here or near for the global economic downturn and the stock market collapse.
Reaction to the two bits of gloomy data on Friday was nearly nonchalant. MSCI's all-country world stock index, boosted by gains across Wall Street, Europe and Asia, headed for its seventh positive session in the past 10. What appears to be happening is that a scattered series of improvements in macroeconomic data, some of which is just not as bad as expected, is outweighing more dire reports.
It has combined with a growing faith that government bailout and stimulus plans will work. On Friday, markets were driven forward by growing hopes that a $900 billion-plus U.S. economic package would be passed by Congress soon.
The gist of the flickering optimism is that the much-touted green shoots of economic recovery may be about to pop up out of the recessionary mire.
"For those of an optimistic bent, credit markets have ... begun to function, money supply is up and investment flows into emerging markets remain positive," State Street said in a note that otherwise showed highly cautious investment flows.
"This might yet prove to be the last hurrah of extreme risk aversion," it said.
The evidence for optimism comes from two places. First, there have been better-than-expected economic reports.
Arguably the chief among these was a rise in China's official manufacturing index, which was coupled with a surge in bank lending and a comment from the central bank that government stimulus shows some signs of early success.
China's economic recovery is widely seen as a crucial element in any global upswing.
Other relatively upbeat reports have included an unexpected improvement in Germany's business confidence and Belgium's bellwether equivalent, and a surprise surge in U.S. existing-home sales.
The Baltic Exchange Dry Index, a proxy for world trade, is up more than 100 percent for the year so far.
RELATIVITY THEORY
Jean-Claude Trichet, the European Central Bank president, has noticed.
"There have been tentative signs of stabilisation in some survey data, albeit at historically low levels," he said while holding rates steady on Thursday.
Improvements have also been noted within the battered financial sector. Citi Private Bank told its clients this week that seven out of nine indicators it has designated as "signposts" to recovery improved in January.
Among them were a narrowing LIBOR-OIS spread, suggesting an easing of money market tension, and an overall better reading from Citi's proprietary financial conditions index based on lower energy costs and growing money supply.
The second optimism boost has essentially been the fact that equity markets also appear to have bottomed or be bottoming after last year's massive falls.
The MSCI world index is trading in a range above the trough it hit last November, a low it has not really threatened to sink to again despite a bearish January.
This has firms such as the giant investor BlackRock saying that equities are in a zone that offer reasonable prices.
Wealth managers at Credit Suisse, meanwhile, are urging clients to be a bit less cautious. They have cut back on defensive stocks, for example, and become a bit more positive about cyclicals that do better when economies improve.
"There are signs of the beginning of an (economic) bottoming out process," Giles Keating, head of global research at Credit Suisse Private Bank, told Reuters Global Investing blog (http://blogs.reuters.com/globalinvesting/).
"There is deep value out there in some equities," he said.
CAUTIONARY TALE
Not all the news, or course, has been conducive to this tentative optimism, as the U.S. and German data showed on Friday.
Many investors are also quick not to rule out deeper losses on world equity markets.
Even as Keating was painting a picture of improving markets, for example, he said it was "unlikely to be realised in a smooth process".
Investment surveys also show little in the way of risk appetite.
State Street said its institutional investor clients remained in extreme risk aversion territory while Reuters' latest asset allocation polls showed equity holding at a series low and money being held in safer cash and bonds.
An optimist, however, would say that it is exactly when things are at their gloomiest that things start to turn. (Editing by Stephen Nisbet)