Brave New World

Equity market rally? Wise up 13/03/2009

The rally witnessed in equity markets this week (with a further rise in the S&P yesterday of 4%) has, rather implausibly, coincided with a number of developments that should give investors cause for concern. The upturn in sentiment has largely been based on a leaked memo(!) sent by Citigroup indicating that the banking group had achieved profitability earlier in January and February, bolstered by a similar statement by Bank of America yesterday. But consider the following negatives that did not exist a week ago:

1. Greater certainty that the G20 meeting will yield nothing substantial- despite conciliatory comments from the White House yesterday, despite comments to appease the markets, there is a growing acceptance that the disagreement between the EU and a growing consensus in the rest of the world is unlikely to be resolved.

2. Substantial measures to deal with economic crisis, the potential for a currency war following yesterday’s decision by the Swiss National Bank to directly intervene in the FX market. The JPY has already been under selling pressure in the last 24 hours in anticipation of BoJ intervention. 

3. Comments by the Chinese Premier expressing explicit concern about the credit worthiness of the US. Addressing the end of the annual session of parliament Premier Wen said: “We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries. So I hope through you to again call on the United States to maintain its creditworthiness, abide by its commitments and ensure the security of China’s assets.”