As global recession warnings sound, markets hit the afterburners

By Marc Jones

LONDON (Reuters) - Like bulls in a China shop, financial markets have gone on the rampage just as predictions of another global recession gain ground and talk swirls of a lost decade in Beijing.

Having taken a 13 percent battering over August and September, MSCI's 45-country world stock index has clawed back exactly half of that in an astonishing turnaround this week.

It seems particularly odd timing, coming as renowned Citi economist Willem Buiter warns China could drag the world back into a two- or even three-year recession and Societe Generale flags the dangers of a Japanese-style decade of stagnation.

Hard data has also taken a clear turn for the worse.

Even ignoring China, industrial output in Germany, probably the most connected of world's big economies due to its high-end machinery and car exports, is at its lowest in a year.

The last set of U.S. jobs and manufacturing numbers were unambiguously grim, Europe's main high-flyers Britain and Spain have started to lose altitude, Russia is reeling and the IMF has just forecast a pan-Latin American recession this year.

So why the sudden market rally?

It makes perfect sense to buy stocks, currencies or commodities when they are cheap. But traders will also argue that markets always price in real time what official statistics only show later.

By that logic, the current rebound might suggest the gloomy data now coming through has already been factored in and that the global rout and growth worries may have been overdone.

"We are buying select emerging markets at multi-decade or all-time low valuations. We are buying the Mexican peso at the weakest level it's been in history," Franklin Templeton's star bond investor Michael Hasenstab said on Tuesday.

"On a valuation level, this is not a once in a decade, this is a multi-decade opportunity to buy very cheap assets."

'BE BRAVE'

He is not the only one piling in. Even as Citi was flagging Buiter's global recession call this week, its equity strategists declared it was "time to be brave" and buy stocks.

From a psychological point of view it has also been helpful that oil is back above $50 a barrel and that Chinese markets have steadied over the last month - although it is notable that they been closed for all of this week's rally.

In terms of data, though the IMF cut its global forecasts again on Tuesday, that wasn't enough to suggest the kind of worldwide recession predicted by Buiter. It didn't even budge its China projections.

There is also of course the prospect that the slowdown will lead to more stimulus and rate cuts in big economies like China, the euro zone and Japan, and further push back long-awaited U.S. hikes.

But hadn't investors come to the conclusion a few weeks ago that that would confirm a global flatlining?

"If we're not careful, we're going to talk ourselves into a recession," said Pierre Sarrau, deputy chief investment officer, multi-asset strategies, at Blackrock in London.

"There are signs we're returning to growth. It's a highly uncertain environment though."

(Additional reporting by Jamie McGeever; editing by John Stonestreet)