"Fullermoney has long held the view that, when assessing market conditions, considerable weight must be given to monetary conditions (i.e. expansion, contraction or change from one to other). To what extent does the emerging regime of accommodative monetary policy coupled with tightening fiscal policy (the austerity play) diminish the impact of monetary conditions?"

David Fuller's view Thanks for a good question likely to be of interest to many subscribers.

I maintain that monetary conditions are, on average, the most important medium-term influence on equity prices, although they can be temporarily overwhelmed by other conditions. Naturally, investor perceptions regarding monetary policy are extremely important, as is the timing. For instance, if monetary policy has reversed from restrictive to accommodative after a stock market slump, the bullish impact can be explosive. Conversely, Fullermoney has spoken of bull markets being assassinated by the introduction of restrictive monetary policies to curb inflationary overheating.

An important point about monetary expansion or contraction is that the influence is far greater if most countries are participating. Also, an accommodative monetary policy in a large economy such as the USA will most likely influence market trends elsewhere.

Regarding the influence of fiscal tightening at a time of continued monetary accommodation, I think that is a more difficult call, partly because we see it less frequently. It will probably depend on how investors think the austerity play will affect corporate profits. If it is perceived as a cut in wasteful spending in order to strengthen the national balance sheet, it should be positive, all other factors being equal. Conversely, if it is regarded as damaging GDP, the influence may be negative.

Lastly, the Autonomies will be less negatively affected by weak growth in their home country or region, whether due to deleveraging or government austerity programmes, if investors feel that those companies are well leveraged to the global economy's growth engines.