Calm crept back into markets this week as the turbulence of the preceding fortnight, which had been fuelled by geopolitical uncertainty, eased.
The pointers to confidence all moved in the right direction. Safe-haven assets such as gold and bonds have come off their highs of last week.
The Chicago Board Options Exchange Volatility Index, or Vix, had by Friday sunk below 13 points after creeping above 17 several times as troubles in eastern Europe and the Middle East rattled investors.
Large Australian corporates did their bit too. A stream of earnings results largely in line with expectations helped the sharemarket recover some lost ground.
On Friday morning, the S&P/ASX200 was trading at 5572 points, up 2.5 per cent on last Friday's close, but was still 1 per cent below a pre-jitters high of 5637 points.
Weighing on the rally were already high stock values, some instances of poorly managed earnings expectations and a few disappointments.
On the upside, Domino's delivered strong results and a solid 20 per cent earnings outlook for the current financial year and, along with Crown and Telstra, provided good ballast for the market.
JB Hi-Fi, Wotif and Woolworths’ all missed their targets and gave disappointing outlooks.
A record result from Commonwealth Bank failed to over-excite investors, with the shares slipping slightly on the day of chief executive Ian Narev’s upbeat presentation.
Analysts ascribed this to the already full valuation of Australia's biggest bank, and the world's most expensive by some measures.
Investor demand for scarce yield in a world of near-zero interest rates has been driving up share prices around the world. In the Australian market heavyweights such as the big banks have been popular. Companies played to this with talk about capital management, buybacks and the like.
"Our downside scenario reflects our view that the market has moved away from fundamental valuation, and is valuing the banks on relative metrics, particularly yield relative to cash alternatives," UBS banking analyst Jonathan Mott said in note.
Fidelity Australian Opportunities Fund portfolio manager Kate Howitt said Australia's ageing population meant companies such as CBA and Telstra had become market darlings for a growing group of people easing into retirement or semi-retirement. She described the shares as "bond proxies".
"The issue with Telstra and CBA is they have really strong cash generation. And while there will be oscillations around fair value, in markets where people are investing primarily for income, this cash generation is what is most valued," she said.
Others argued that after last year's bull run, investors were pausing to reflect on share valuations and becomingmore sceptical about earnings growth in the months ahead.
Delivering this growth, they argue, will depend increasingly on sales improvement and further cost-cutting and capital management.
Telstra's announcement of a $1 billion share buyback on Thursday, which helped reanimate the sharemarket after a midweek lull, typified another emerging trend that reflects today’s low interest rate environment.
By using cash and cheap credit to take stock off the market, companies can manage their balance sheets while investors can cash in at a premium or hold securities that are instantly repriced on relative scarcity.
Cash splashes like these should eventually feed into the real economy.
Equity returns and increasing portfolio values should add to rising house prices to inflate people’s sense of wealth, which should translate into busier cash registers.
However, there is mounting evidence that this transferral of investment wealth into spending on consumer goods, travel and services has been slower than normal.
The reasons for this are manifold, say economists, but real wage contraction and broader unease about job security play a leading role.
Because while efficiency gains have helped companies deliver the yield demanded by investors, they have come at the cost of jobs and real wage freezes, which has undermined consumer confidence.
Real wages growth has been negative for three consecutive quarters, and this trend is unlikely to shift until unemployment starts to fall from its surprisingly high 6.4 per cent level.
So, while a recent flurry of surveys points to improving business confidence and conditions, job insecurity and broader concerns about the global economy and geopolitical events are curbing Australian consumers’ enthusiasm.
Commenting on divergent sets of data on business and consumer sentiment during the week, Royal Bank of Canada noted: “The two series usually converge, albeit with a lag, and we may be seeing some signs of this following the fallout from the 2014-15 [federal] budget.
“However, we remain cautious on the consumer front. We see limited scope for further substantial gains in consumer confidence."
This caution, and increasing bets that the Reserve Bank of Australia will keep the cash rate at 2.5 per cent at least until June – or even cut rates this year – could gradually put downward pressure on the Australian dollar, which will help non-mining exporters and other parts of the economy pick up the slack left by the end of the mining investment boom.
Dollar watchers keenly await Tuesday's release by the Reserve Bank of the minutes of the last board meeting, when it voted for the 11th successive month to keep the cash rate at 2.5 per cent. On Wednesday, Reserve Bank governor Glenn Stevens appears before the House of Representatives Standing Committee on Economics in Brisbane.
"The fundamentals for the domestic economy remain sound," CommSec economist Savanth Sebastian said.
"However, the patchiness of the domestic economy has resulted in businesses curtailing costs."
Much of the world is watching US economic data for hints of when the US Federal Reserve will start lifting interest rates.
Excitement over an early move on rates after the Fed ends its so-called quantitative easing program in October was one trigger of the last bout of global unease, along with Russia's retaliatory economic sanctions against the West.
However, some economists say the markets remain vulnerable to another global shock.
"The last couple of weeks have really bought risks back to the markets' attention, and it is likely going forward that this brings an end to the period of sub-normal volatility," BT Investment Management head of interest and fixed income Vimal Gor said.
"The geopolitical risks haven’t gone away, though, and could easily come back to hit markets again soon."
