Many reasons were advanced for the rally in global markets on Thursday. The possible suspension of mark-to-market rules in the US, which would mean that banks would be let off having to take large write-downs, was one factor.
Outlook positive: Good March numbers from auto companies and higher cement prices and sales reinforced the rally in the markets. Madhu Kapparath / Mint
A more dubious one was hope of a positive outcome from the Group of Twenty meeting. But perhaps the most important one was optimism that the worst is over for the global economy.
Better-than-expected auto sales in the US, higher industrial output in South Korea and an unexpected rise in UK home prices were some of the straws at which the markets have been clutching recently. The JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) rose to 37.2 in March, a five-month high.
Back home in India, good March numbers from auto companies and higher cement prices and sales reinforced the rally. Yet there were quite a few contrary indicators that were ignored by the markets. These include falling house prices in the US and a survey by the Bank of Japan that showed business confidence at a record low.
There are powerful headwinds ahead. For example, while the bounce in the global PMI is welcome and although it’s true that JPMorgan’s director of global economics coordination did say that the worst of the recession may be over for manufacturers, the fact remains that global manufacturing continues to contract month-on-month and all that has happened is that the rate of contraction has eased somewhat. Also, investors seem to have forgotten the “toxic assets” on the balance sheets of Western banks and the impact of the deteriorating economy on bad loans. Doubts about the Geithner plan also seem to have evaporated. And finally, the warnings that it’ll take a long time for zombie banks to stoke a return of risk appetite are being resolutely ignored.
But ignoring bad news is generally a sign the markets want to rally. “The latest data certainly paints a picture of money leaving essentially passive vehicles such as money market funds and being put to work in funds offering more risk and higher rewards,” noted EPFR Global senior analyst Cameron Brandt in an analysis of fund flows. And even super bear Marc Faber has recommended an “intermediate positive stance” and talked of a bear market rally. But as mentioned before, even if a bottom is in place, that doesn’t automatically mean a recovery is around the corner.
We may very well bump along the bottom for a long time.
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