Markets: too early to cheer

Markets: too early to cheer
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First Published: Sun, Mar 15 2009. 09 23 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Sun, Mar 15 2009. 09 23 PM IST
Global stock markets staged a breathtaking rally over the past week, soon after testing multi-year lows. India, too, joined the party.
So, have the markets finally found a bottom?
Illustration: Jayachandran / Mint
That seems unlikely. The global markets have staged several bear market rallies since the beginning of 2008, and this one seems to be another of the sort. The 14% bounce in the Dow Jones index last week is somewhat similar to the 17% rally between the panic of November and the early days of the Obama administration in early February.
That seems unlikely. The global markets have staged several bear market rallies since the beginning of 2008, and this one seems to be another of the sort. The 14% bounce in the Dow Jones index last week is somewhat similar to the 17% rally between the panic of November and the early days of the Obama administration in early February.
The new rally was sparked off by a letter sent by embattled Citigroup Inc. CEO Vikram Pandit telling employees that the bank had operating profits in the first two months of 2009. That lifted investor spirits and financial stocks led the rise in global equity prices.
The Pandit letter may indicate that perhaps the worst of the financial crisis is now behind us. The worst damage has been done and credit markets have eased a bit.
However, the biggest risk facing the world economy at this juncture is not that yet another big global bank will need to be bailed out but that world output will shrink for the first time since the Great Depression of the 1930s. Economic growth is tumbling in all corners of the world, and the huge fiscal and monetary stimuli provided by governments have yet to work their expected magic.
There is also another set of problems that could become more important as the year advances. Many countries could find it hard to finance their current account deficits and service their foreign debt. The epicentre this?time?around is likely to be in East Europe rather than in East Asia. But a few sovereign defaults could ignite a new round of fear and risk aversion.
True, markets tend to price the future—both the opportunities and the risks. It is well known that markets bounce back before economies do. But sometimes they provide false signals, as countries such as Japan know from their experience of two decades. Several rallies petered out as the once-dynamic Japanese economy stumbled from crisis to crisis.
India, too, has its own unique problems, especially a public finance mess and many overleveraged companies. The rally in our markets mimics the global one. Technical analysts, who depend heavily on historical price patterns, are perhaps right to see the good news: the lows of late 2008 were not breached.
Yet, it is too soon to pop the champagne to herald the death of the bear market.
Have the global markets indeed bottomed out? Tell us at views@livemint.com
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First Published: Sun, Mar 15 2009. 09 23 PM IST
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